Iteris (ITI) Q3 2021 Earnings Call Transcript

Iteris (ITI -2.01%)
Q3 2021 Earnings Call
Feb 02, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Iteris' fiscal third-quarter 2021 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead.

Todd Kehrli -- Investor Relations Contact Officer

Thank you, Operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal 2021 third quarter ended December 31, 2020. Joining us today are Iteris' president and CEO, Mr. Joe Bergera; and the company's CFO, Mr.

Doug Groves. 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. These statements are based on current information, are subject to change, and are not guarantees of future performance. Iteris' undertaking -- is not undertaking an obli -- obligation to provide updates to these forward-looking statements in the future.

Actual results may differ materially 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 you'll find a supplementary report of our third-quarter financial metrics and the webcast replay of today's call on the investor relations section of the company's website at iteris.com. Now, I'd like to turn the call over to Iteris' president and CEO, Mr.

Joe Bergera. Please proceed.

Joe Bergera -- President and Chief Executive Officer

Great. Thanks, Todd, and good afternoon, everyone. I appreciate you joining us today. As you saw at the close of the market, we issued a press release announcing the financial results of our fiscal third quarter ended December 31, 2020.

Please bear in mind the effect of two recent transactions on the presentation of this period's results. On May 5, 2020, we completed the sale of our agriculture and weather analytics segment to DTN, LLC. Therefore, we're reporting the results of that segment as discontinued operations for all periods presented in today's earnings announcement. And as such, I'll be discussing only our continuing operations during the remainder of this call.

Conversely, we completed the acquisition of the assets of TrafficCast International, Incorporated on December 7, 2020. Although a substantial portion of the acquisition costs were incurred in our December 31, 2020 period, the revenue impact for the stub period was minimal. The results for TrafficCast commercial business, which is software, is included in our transportation systems segment results, and the results of TrafficCast public sector business, which is primarily IoT devices, is included in our roadway sensors segment. Given that Doug will discuss the TrafficCast accounting implications in more detail in a few minutes, I'd like to now turn your attention to our third-quarter highlights.

Our software-enabled delivery model continued to demonstrate its resiliency in our third quarter. However, COVID-19 impacted the operations of some of our subcontractors. This led to milestone in revenue recognition delays on a couple of large projects in Southern California in particular. Similarly, the transportation systems segment experienced some timing issues that impacted our third-quarter net bookings result of $20.6 million.

Despite these issues, we reported $28.2 million in total revenue, representing a 5% increase compared to the same prior-year period. Our year-to-date total net bookings of $88.9 million represent a 3% year-over-year increase. At the end of our third quarter, the company's total ending backlog was a record $76.9 million, which is a 22% year-over-year increase and a 5% sequential increase. The total ending backlog figure does include the addition of $13.2 million in backlog from the TrafficCast acquisition.

However, our total ending backlog would have increased on a year-over-year basis without the TrafficCast acquisition. The combination of the company's continued growth and improved cost structure following the strategic actions we took in our first quarter drove a significant increase in adjusted EBITDA and net income even after the impact of the TrafficCast acquisition costs. Now, let me provide an overview of our third-quarter sales and product performance by segment. Our transportation systems segment recognized $14.1 million in third-quarter revenue, representing an 8% decrease versus the same prior-year period.

As referenced earlier, the decline in segment revenue was due to softness in subcontractor revenue, stemming mostly from COVID-related delays on two very large projects in Southern California, which was only partially offset by the revenue contribution from the TrafficCast acquisition. At this time, the various projects are moving forward and we expect the segment to recoup the subcontractor revenue over the next couple of quarters. During the third quarter, the segment's direct labor revenue, in other words, our nonsubcontractor revenue, was consistent with our expectations. Similarly, the heightened COVID restrictions led to some delays in a couple of large orders and impacted the segment's third-quarter net bookings, which were recorded as $6.8 million, versus $13 million in the same prior-year period.

About 43% of the segment's third-quarter net bookings will be recognized in the future as annual recurring revenue. That's up from 26% last year. As a reminder, we typically experience a significant sequential decrease in third-quarter bookings due to various seasonal factors. Therefore, the year-over-year comparison is the most relevant.

We had anticipated a potential year-over-year decline in bookings due to a relatively higher concentration of large orders in a period often affected by seasonality. But the abrupt reinstitution of COVID mitigation measures in parts of the U.S. exacerbated the situation, causing a larger fluctuation in net bookings than expected. That said, the delayed orders have not been canceled and we expect to begin booking at least some of these orders originally contemplated for the third quarter as early as our fourth quarter.

Notable third-quarter contract, awards, and or bookings in the period include a four-year on-call contract with an $8 million ceiling from Hillsborough County, Florida for specialized consulting and software as a service. As we receive future task orders under this contract, the orders will be recorded as bookings. But they were not recorded as such in the third quarter. A five-year on-call contract with a $5 million ceiling from the Florida Department of Transportation District 7 for traffic signal retiming and specialized consulting, again, against which will receive future task orders that will then be recorded as bookings.

A $600,000 task order from the Virginia Department of Transportation to develop a strategy and roadmap for the Commonwealth to achieve connected and automated vehicle readiness and a contract with an undisclosed multi-line insurance company for an undisclosed value to complete a proof of concept related to the use of our mobility intelligence software solutions to help determine auto insurance rates. The transportation systems segment ended the quarter with a backlog of $64 million, which represents a 3% sequential increase and a 14% year-over-year increase. The TrafficCast acquisition contributed $9.4 million in backlog to this segment. Now, moving to our roadway sensors segment.

This segment reported record third-quarter revenue of $14.1 million, which represents a 23% increase versus the same prior-year period. This rate of growth is well above the category 6% to 8% historical growth rate, demonstrating that we continue to take market share based on our superior product performance and customer support. In addition to the strong revenue performance, the roadway sensors segment made tangible progress against various other important initiatives. For example, the segment received an approximate $3 million contract to provide the Coachella Valley Association of Governments a combined detection, travel time, and cellular vehicle to infrastructure communication system that'll be booked and deployed over the next several quarters.

The segment continued to develop our Cisco relationship by among other things finalizing a new contractual mechanism for Iteris to provide Cisco products to Texas public agencies on preferable terms. The segment completed a successful pilot and launched a new managed service that utilizes process virtualization to continuously and proactively monitor intersections and arterials equipped with Iteris' advanced detection sensors, and the segment continued to deliver against critical launch milestones for our next generation detection platform that will include among other competitive new features high definition video and artificial intelligence for best in class object classification. With that, I'll let Doug comment on our financial results. After which, I'll conclude my remarks.

Doug.

Doug Groves -- Chief Financial Officer

Thank you, Joe. Good afternoon, everyone. As a reminder, please see the company's 10-Q filing, press release, and supplemental financial metrics document, all of which are posted on our IR website for further description of matters under discussion during the call today. As Joe noted, the results of the agriculture and weather analytics segment are reported as discontinued operations in our SEC filings.

And today, my comments will be focused only on our continuing operations. Likewise, the TrafficCast acquisition, which closed on December 7, 2020, are included in our results for the quarter albeit one month. The commercial business, which is all software, is included in our transportation systems segment's results, and the public sector business, which is primarily IoT devices, is included in our roadway sensors business' results. Consistent with the last several quarters' results, we've seen the performance of the business in the third quarter continued to improve with favorable year-over-year trends in certain key metrics, including top-line growth, increasing backlog, and margin expansion.

We continue to diligently manage our costs, which is helping to drive the year-over-year operating margin expansion. Now, I'll move on to the details of the third-quarter results. The total revenue for fiscal 2021 third quarter increased 5.4% to $28.2 million, compared to $26.7 million in the same quarter a year ago. Our gross margins in the third quarter were 41.4%, compared to 39.8% from the same quarter last year.

The increase in gross margins was driven primarily by better product mix and increased volume in the roadway sensors segment. Operating expenses in the third quarter were $12 million and flat compared to the prior-year quarter. As we mentioned on our second-quarter earnings call, we're continuing to improve our profitability year over year and remain focus on solid execution to drive improved results. We reported a GAAP operating loss in the third quarter of $300,000, which included $300,000 in acquisition costs, compared with the GAAP operating loss of $1.35 million in the same quarter a year ago.

The GAAP net loss from continuing operations in the third quarter was $261,000, or a loss of $0.01 per share, as compared with a $1.25 million loss, or $0.03 loss per share, last year. Adjusted EBITDA for the third quarter increased $1 million to $1.45 million, or 5.2% of revenue, which compares to $512,000, or 1.9% of revenue, in the third quarter of last year. Now, let me turn to our segment results. Our transportation systems' revenue for the third quarter was $14.1 million, compared to $15.3 million in the prior-year quarter, a decrease of 8%.

As Joe mentioned, this segment was negatively impacted by temporary COVID-related supply chain and logistics issues that affected some of our subcontractors and led to project and revenue recognition delays, particularly in Southern California. During the period, the segment's direct labor revenue was consistent, though, with our expectations. Segment level operating income for the third quarter was $2 million, compared to $2.7 million from the prior-year quarter. And the related operating margins were 14%, compared to 17.4% last year.

The margin decrease was primarily driven by the decreased volume in the segment. Our roadway sensors' revenue for the third quarter was $14.1 million, compared to $11.4 million in the prior-year quarter, or an increase of 23%. The segment operating income was $2.7 million for the quarter, compared to $1.5 million last year. And then related operating margins were 19.2%, versus 13% last year.

The improvement in margins was driven primarily by the increased volume and improved product mix. Corporate expenses in the third quarter were $4.3 million, compared to $5.2 million in the prior year. The prior-year period did include $553,000 in executive severance and transition charges. Now, turning to liquidity and capital resources.

The total cash and short-term investments were at $22.5 million at the end of the third quarter. The decrease quarter over quarter and over prior year was a result of the $15 million payment made in closing the TrafficCast acquisition. We spent $283,000 capital expenditures in capitalized software costs in the quarter, and we expect these expenditures to remain under 1% of revenue for the whole year, reflecting our asset light business model. Operating cash flow from continuing operations was down $898,000 compared to Q2 and was impacted by the decreased profitability but also the timing of certain inventory and accounts payable activity.

We remain focused on improving our profitability and cash generation to fund our expected future growth. So in summary, we're pleased to report another solid quarter performance, along with closing the TrafficCast acquisition, despite seeing some revenue impacts in Q3 due to COVID-19. We remain focused on improving the business and vigorously managing our working capital and cost structure to improve margins despite a difficult operating environment. With that, I will turn the call back over to Joe.

Joe.

Joe Bergera -- President and Chief Executive Officer

Great. Thank you, Doug. Although we expect the economic environment to remain volatile and uncertain in the near-term, we do expect our rate of revenue growth in the fourth quarter to increase compared to the rate of growth in our third quarter. And we remain bullish about the long-term prospects for the smart mobility infrastructure management market.

Indeed, mobility as a service, vehicle electrification, vehicle to infrastructure integration, and connected and automated vehicles represent favorable secular trends that will continue to shift the allocation of transportation infrastructure budgets from traditional pick and shovel projects to advanced technology initiatives. And these same trends will foster new software-enabled service delivery models that will continue to change our transportation agencies as all levels of government fulfill their missions. The Iteris' ClearMobility platform is a key element of our strategy to capture these public sector opportunities. And with the recent acquisition of TrafficCast, we've added intellectual property to our ClearMobility platform that positions us to address new commercial markets as well.

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. We believe the acquisition of TrafficCast will enhance Iteris' leadership in the smart mobility infrastructure management market by among other things accelerating the development of our ClearMobility platform. On a related note, we recently announced a general availability of the initial release of our ClearMobility Cloud, which is the mobility data management engine, API framework, and microservices ecosystem for Iteris' ClearMobility platform.

The initial release of ClearMobility Cloud includes a unified portal that enables users to access multiple Iteris software applications for easy navigation between modules within Iteris' ClearGuide transportation performance measures solution. The initial release of ClearMobility Cloud also facilitates integration between ClearGuide and the IRIS open-sourced Advanced Traffic Management System. From an operating perspective, both our transportation systems and roadway sensors segments continue to experience healthy demand despite the overall economic environment. And at this time, we believe Iteris has instituted appropriate measures to minimize the probability of direct disruptions to our business.

That said, some of our revenue, especially associated with large, multi-element projects, is dependent on the ability of third parties to navigate COVID-19, and recent history does suggest this will continue to represent a source of near-term risk. The total value of our transportation systems sale's pipeline is near historic highs, though the pipeline does have a higher than normal concentration of large sales opportunities. This concentration suggests the segment remain more susceptible than normal to some timing effects or some lumpiness. Similarly, our roadway sensors segment continues to experience healthy order flow and an increase in the size of certain purchases.

We recorded a $1 million-plus order from the city of Moreno Valley, California in our second quarter, and as mentioned in my earlier remarks, we received an approximate $3 million award from the Coachella Valley Association of Governments in our third quarter. This award has yet to convert to bookings or recognized revenue. In general, the increase in the number of very large orders is a positive development, but it could cause the roadway sensors segment to experience some atypical sequential fluctuations in revenue due to the timing of revenue recognition on such deals. Notwithstanding our overall long-term bullishness, we will continue to provide financial commentary only one quarter at a time until the economic environment reestablishes some form of equilibrium.

And accordingly, our guidance commentary today will focus only on our fourth quarter. As for our fourth quarter, we are pleased to enter the period with a record backlog and an active sales pipeline. But our transportation systems segment, as I've said, has a high degree of exposure to subcontractor revenue during the fourth quarter period and an unusual prior-year comparable compounds that situation. As you may recall, the transportation systems segment realized a significant revenue in contribution margin benefit in the prior fourth -- prior-year fourth quarter due to the timing of certain project milestones.

Given the circumstances in front of the transportation systems segment, meaning the high exposure to large deals and also the challenging comparable, we expect the segment's revenue growth to be in the mid single-digits in our fiscal 2021 fourth quarter due to our near-term -- again, due to our near -- near-term exposure to subcontractor revenue. Whereas, we expect the revenue growth for our roadway sensors segment to be in the mid-teens. This should result in total fourth-quarter revenue for the company in the high single-digits. Please note that we are cautiously optimistic about a potential nationwide infrastructure investment initiative, and our expectation regarding fourth-quarter results does not assume or anticipate any such investment having an impact on our fiscal 2021 fourth quarter.

In terms of profitability, we anticipate the transportation systems segment to report a decrease in year-over-year segment level gross margin and operating income dollars due to the segment's current exposure to further short-term delays in subcontractor revenue and, again, the unusual prior-year comparable. However, we expect the roadway sensors segment to report an increase in year-over-year segment level gross margin and operating income dollars, as well as in expansion in both margin rates. With corporate expenses expected to be in line with recent quarters, our total net income and adjusted EBITDA for the fourth quarter is likely to be similar to our third-quarter results. Now, with that, we'd be delighted to respond to your questions and comments.

Operator, do we have any questions?

Questions & Answers:

Operator

We do. [Operator instructions] We'll pause a moment to assemble the queue. We'll take our first question from Jeff Van Sinderen with B. Riley.

Please go ahead.

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

Good afternoon, everybody. Maybe you can just talk a little bit more about the supply chain issues with some of the subcontractors. Just -- I guess kind of what the nature of those are, the status at this point, the expected duration. It sounds like it's still going to be a headwind in Q4.

And then when you -- when you would kind of expect those to lift and -- and the segment to resume organic growth?

Joe Bergera -- President and Chief Executive Officer

Yeah, Jeff, it's an excellent question. And obviously, we're spending a lot of time thinking about those very things. I don't want to comment on the specific operational issues of specific companies, so I'm going to talk in generalities here, but hopefully, it'll provide some useful color. In the -- the particular projects that I talked about, we have a dependency on some equipment, which is provided by third parties.

Some of this equipment is signal controller equipment. And in the case of this particular company, the signal controller equipment is actually manufactured outside of the United States. And this particular vendor experienced about four to six weeks during which manufacturing facility was shut down. Its international manufacturing facility was shut down due to COVID.

They subsequently resumed manufacturing, but then they encountered issues importing that equipment into the U.S. As a lot of people may be familiar, there is a lot of backlog at a number of our ports right now. And when the equipment was finally received by this customer, the customer is unable to take possession because they had recent -- this -- this bigger customer in Southern California was being impacted by some of the more aggressive mitigation measures or shelter in place measures that were instituted by the state. And so those measures were particularly severe in Southern California and impacted this agency's workforce.

So it's just a series of events that led to an approximate three-month delay and prohibited us from proceeding to a critical milestone. At which point, we would have been able to recognize revenue. At this point, the equipment has been shipped, and I -- actually, I believe has been received. I'm not sure whether we've cleared the technical milestone, but we would anticipate to do so shortly.

So that particular issue we think we're going to get over and we'll put behind us. But what we're trying to say here is that based on that experience in the third quarter and the fact that the overall environment hasn't changed a lot, we are anticipating that there could be other similar situations like this that might occur in the fourth quarter. And therefore, we're taking a slightly more cautious note. With respect to your question about when we expect this to lift.

I -- I -- no one has a crystal ball. These questions are obviously being asked of many people, including all of our public health officia -- officials, who would also say that this is a very dynamic environment. But I would hope that as we get into our first quarter, we'll start to see some higher degree of no -- renormalization in the broader economy. And as a result, I would like to think that our business would begin to renormalize.

But obviously, there's a lot that can happen between now and April 1, and we'll be monitoring that closely. But again, we do feel that, in general, with the availability of the vaccines, some other measures that are being taken, not the least of which is potential additional stimulus, we would expect to see things begin to resume some normalcy hopefully as early as our first quarter. But we'll have more to report on that in March or April.

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

OK. That -- that's really helpful. And then if we could turn to ClearMobility Cloud for a moment. I know you talked about that during your Analyst Day or you talked a lot about ClearMobility during the -- during the Analyst Day, and -- and you spoke to the cloud launching in your prepared comments today.

But could you speak more about the kind of partners that you're aiming to bring on board to integrate with ClearMobility Cloud? And also if you could remind us of the commercial opportunity of that?

Joe Bergera -- President and Chief Executive Officer

Yes, sure. There are a number of different types of partners. One obvious partner would be different data providers. As we've talked about in the past, we have a quite mature partnership with HERE Technologies, which provides, in particular, a lot of connected vehicle data that we -- we use extensively.

There are other potential sources of similar data. And then there are sources of entirely different data that would further enrich our overall data set. And some of these relationships are somewhat not necessarily proprietary, but there's some level of trade secrets, so I don't want to get into discussing all the various parties that were in conversations with because we think that our knowhow is a competitive differentiator and we don't want to share that with -- with the competition. But I would just say that there are certainly additional data providers that we would like to develop relationships with, and those data sources would be ingested and processed in ClearMobility Cloud.

As of today, we deal with HERE Technologies data, various agency data, and some other third-party data sets. Another logical partner for us would be other application vendors. As I mentioned on this call, in the first release of ClearMobility Cloud, we certified out of the box integration with IRIS, which is an open-sourced commonly used ATMS that operates in the cloud. We would expect or you can expect that we would likely be announcing relationships with commercial -- other commercial software application vendors or integrations with other open-sourced software applications such as -- such as IRIS.

And then beyond that, we are also interested in working with solution providers that can incorporate components of our ClearMobility Cloud into their own solution sets. And so those potential partners would be likely to be like systems integrators, or other traffic engineering, and traffic operations firms.

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

OK, great. That was -- that was a lot to go over, so I'll -- I'll jump back into the queue. Thanks for taking my questions.

Joe Bergera -- President and Chief Executive Officer

Of course. Thanks, Jeff.

Operator

We'll take our next question from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore -- Northland Capital Markets -- Analyst

Great. Hi, guys. I mean all the results there are solid profitability. On the recurring revenue side of things, can you kind of update us on what percent of revenue was recurring in the December quarter? And then what -- what should we think about TrafficCast's contributing to the March quarter?

Joe Bergera -- President and Chief Executive Officer

Yeah, Doug, do you want to take that?

Doug Groves -- Chief Financial Officer

I'll -- I'll take that one, Joe. Yeah. So Mike, in the -- in the current quarter, the recurring revenue was about 20% because we only had one month worth of TrafficCast revenue in our quarter. Because that business is almost 60% software recurring revenue, we expect that 20% to start moving toward the mid-20s, like 24%, over the next several quarters as we get them under our belt and their results into our consolidated results.

So it will increase in addition to the bookings that we've been recording the last few quarters, which have been heavily weighted to annual recurring revenue. So I -- I think -- we're -- we're expecting that we're going to continue to grow that much faster than the top line as part of our overall strategy and improving the business model. As far as the run rate goes, I think in our press release, we put out that they were doing a trailing 12 months of about 14.3 a year in revenue. And obviously, we're going to look -- looking to grow that as well.

Mike Latimore -- Northland Capital Markets -- Analyst

Got it. OK. And then on the recurring piece to your business, are the EBITDA margins on that similar to the overall business, or are they a little -- a little worse because you're investing, a little bit better? How should we think about this kind of EBITDA margins on your recurring revenue?

Doug Groves -- Chief Financial Officer

So the -- the EBITDA margin is definitely will continue to improve with TrafficCast in the portfolio. As -- as we've talked about I think in the past with investors, so our related tasks platforms today are subscale. The -- and I think as we -- as they grow, we can see more operating leverage. But yeah, we're certainly expecting to see margin expansion with TrafficCast and more recurring revenue.

Mike Latimore -- Northland Capital Markets -- Analyst

OK. Got it. Got it. Great.

And then I guess just last one. Will -- will you be able to over time bundle some of your hardware sales into these maybe larger deals or -- or I guess small city deals too? And then could that become a part of recurring revenue?

Doug Groves -- Chief Financial Officer

Well, that's absolutely our strategy when we think about the platform, the ClearMobility platform, that -- that's -- all the products and services that -- that we offer. And we've got several initiatives under way to go to market. I'll say more as one company than maybe we had been in the past. So product revenues, by definition, are not recurring, but the services that will go along with it that we're able to bundle certainly will.

So that's going to be part of what we're doing -- we -- going forward.

Mike Latimore -- Northland Capital Markets -- Analyst

OK, thanks a lot.

Operator

[Operator instructions] We'll take our next question from Joe Osha with JMP Securities. Please go ahead.

Joe Osha -- JMP Securities -- Analyst

Hello, everybody.

Doug Groves -- Chief Financial Officer

Hi, Joe.

Joe Bergera -- President and Chief Executive Officer

Hi, Joe.

Joe Osha -- JMP Securities -- Analyst

Hey. Two relatively simple financial questions, and then -- then a product question. Yeah. We've kind of talked around this, but -- but can you just help us understand what the non-TrafficCast organic rate of growth for the business in aggregate was in -- in the December quarter? If you want to talk about that sequentially or year on year, it's -- it's fine.

I'm just trying -- I think I can keep that number out, but it would be -- be easier to just -- just ask you.

Doug Groves -- Chief Financial Officer

Sure. So year over year in that 5% growth, a little less than half of that was TrafficCast-related revenue because we only had them for one month. So it -- it was -- was disclosed in our 10-Q. It's about $800,000.

Joe Osha -- JMP Securities -- Analyst

Right. OK. So the -- about half of that year-on-year growth comes from the -- the one month of -- TrafficCast?

Doug Groves -- Chief Financial Officer

Right.

Joe Osha -- JMP Securities -- Analyst

OK. And then looking into the March quarter, is there a decent amount of linearity so we can just roughly take that December TrafficCast number and sort of multiply it by three to get a sense as to how that's impacting the March quarter?

Doug Groves -- Chief Financial Officer

Now, we -- I mean we think it's going to do a little better. I mean the good thing about the business is about half of it is software and SaaS revenue, so it's really pretty much straight line. But the hardware, the IoT devices, just like our hardware business can be a little bit lumpy with big orders swaying any given quarter. So I think no, we're -- we're going to do a little bit better.

The first month under our ownership, we're getting to know them, they're getting to know us. So we would expect the fourth-quarter revenue to do better than just a straight line of the one month we had in our third quarter.

Joe Osha -- JMP Securities -- Analyst

OK. And by hardware, that the TrafficCast hardware component was all BlueTOAD, right?

Doug Groves -- Chief Financial Officer

E --exactly, yup.

Joe Bergera -- President and Chief Executive Officer

Correct. I like -- I like the name.

Joe Osha -- JMP Securities -- Analyst

And then just to help us understand a little bit at -- at the -- at the operating level. How should we be thinking -- yeah, you're -- you're -- you're SG&A and -- and R&D, 10.1 and 1.4 in the December quarter. I mean is that -- to -- to what extent is that a reasonable bogey for a run rate going forward for those line items?

Doug Groves -- Chief Financial Officer

Well -- well, I -- I -- I think it is. I mean that's why within our comments said it was flat year over year, and that's really been our objective. So I think -- I would expect R&D to probably reach about 5% of revenues on an annualized basis, but we should be able to keep SG&A close to what it has been running.

Joe Osha -- JMP Securities -- Analyst

Well, you're down year on year because --- but you dropped some business out. I mean that's -- there's a lot of puts and takes here that's -- that's why I'm asking the question. Last year it was 14.1. So I'm -- I'm just trying to understand what the -- what that run rate is going forward?

Doug Groves -- Chief Financial Officer

The -- it's about what it would be that we experienced in the third quarter.

Joe Osha -- JMP Securities -- Analyst

OK. All right, thanks.

Doug Groves -- Chief Financial Officer

So it's pretty consistent.

Joe Osha -- JMP Securities -- Analyst

All right. OK. Thanks. And then the last question is just shifting to the technology side.

You talked about HERE and -- and other -- other platforms there. There's an enormous proliferation of these data aggregation platforms out there at -- at this point. You've got not just the -- HERE and -- and INRIX, but some of the Orbital folks, the [Inaudible], you've got Spirion, and Planet, and Orbital Insights, all this stuff. Have -- have you thought at all about maybe kind of broadening the -- the funnel in terms of the -- the type of -- of -- of data set that -- that you -- that you ingest?

Joe Bergera -- President and Chief Executive Officer

Ye -- yes, we -- we have. Now, that's not to say that we are stepping back from our relationship with HERE. I mean HERE is a fantastic partner. We utilize both their mapping technology, and -- and they also provide in -- incredibly valuable data to us, and we expect to continue to collaborate closely.

But to your point, Joe, there are various data providers and we think that part of our secret sauce is -- is getting the best data from the -- the best sources and -- and then aggregating that and applying our domain knowledge to present valuable insights to -- to our end customers. So we're very focused on getting the best possible data, again, to benefit the -- our -- our larger data set. Like there's no one provider in our -- in our opinion that -- that has access to all of the data. And -- and of course, we have access to our own effectively proprietary data through our own detection products as well.

So I don't -- I don't want people to lose sight of that. But again, we -- we're very focused on getting the most robust data sets possible. We think that we're uniquely able to do that because of our domain expertise, our own position at the intersection, and in a number of cases, our trusted advisor relationship with agencies through which we're able to get access to data that's not necessarily proprietary because agencies are in the business of providing the public with information, but our knowhow, we think, is unique. And therefore, we think that the resulting aggregate data sets, our data sets are unique and, therefore, more valuable than what other data platforms are able to provide.

Joe Osha -- JMP Securities -- Analyst

OK. Thank you. That's interesting insight. I'll -- I'll jump off.

Thanks again.

Joe Bergera -- President and Chief Executive Officer

Sure.

Operator

We'll take our next question from Mike Shlisky with Colliers Securities. Please go ahead.

Mike Shlisky -- Colliers Securities -- Analyst

Good afternoon. I kind of wanted to start by asking about the kind of medium long-term outlook here given what happened in this quarter and what may happen in the -- in the fiscal fourth quarter. I mean i -- is there any sense as to whether the -- the longer-term outlook for let's say the next fiscal year? You've been saying you can get mid-teens organic growth most of the time. Is that -- is that -- is that number at risk? Do you still think you can get that if COVID doesn't get any -- any worse from here?

Joe Bergera -- President and Chief Executive Officer

Yes. So, Mike, that's -- it's a tough question to answer, and we've been very intentionally just talking one quarter at a time -- about one quarter at a time because -- I mean nobody has a -- a crystal ball and we continue to be amazed at the pace of change in that -- that extremes of the gyrations that we seem to be going through from week to week, and even sometimes day to day. So it's super, super hard to predict. But I would say that there are some things that we were monitoring.

And one is, for example, state budgets. And there's been a lot of research lately which is generally consistent with what I think we talked about at -- and -- and to some degree, at our -- our Investor Conference, which is that state budgets have actually -- the -- the revenue is coming closer to expectations than most states had predicted. And actually, a number of states, including California for example, which is probably our largest market, is expected to have a revenue surplus this year. So things are -- are not, at least at the state level, are probably not as dire as people had expected.

And -- and also, we, being focused on the transportation infrastructure market, benefit from having dedicated sources of revenue that cannot be redirected under most state law. And -- and so we're -- we're cautiously optimistic about next year given where things stand in terms of their current state budget situation and the current outlook. But of course, that market is highly -- or the environment is highly unpredictable and we'll certainly know more in March than -- than we know today.

Mike Shlisky -- Colliers Securities -- Analyst

All right. And I also want to get a little more -- more information about what you called -- I think there were called awards that aren't actually being called bookings or backlog right now. I think you have two or three contracts that you mentioned in your prepared comments.

Joe Bergera -- President and Chief Executive Officer

Right.

Mike Shlisky -- Colliers Securities -- Analyst

I guess I just wanted us just to kind of like figure out. Are tho -- is that common? I mean I haven't heard that happened too many times [Inaudible] years. So is that a common thing? And then is this all fully going to end up being backlog, all of it? Or does it kind of get booked and burned in the same quarter? It's -- it's a -- a bit more short term than other kinds of business that you -- that you currently do?

Joe Bergera -- President and Chief Executive Officer

Yeah. So yeah, we don't get a ton of these contracts. We do -- you -- you -- you might recall that, in the past, we've talked about our Federal Highway Administration contracts where we maintain that Connected Vehicle Reference Architecture for -- for the United States. We will get awarded large indefinite delivery indefinite quantity contracts to support that program, and then there'll be subsequent task orders against that.

So we have, in the past, talked about those contract awards and then the subsequent task orders. But at the state level, it's actually pretty unusual for us to win such large, in this case, the board calls them on-call contracts, but they're essentially indefinite delivery indefinite quantity contracts, and we don't get many of those at the state level. So that was somewhat unique, and we thought it was noteworthy that we were awarded between the two contracts $8 million in on-call con -- contracts from the state. And yes, those -- we -- we would expect that the full $8 million will eventually convert to a formal order or become a booking, and then it'll go into our backlog, and -- and eventually, it will convert to revenue.

If -- the contracts have different periods to them. But I do want to point out that they're both multi-year contracts.

Mike Shlisky -- Colliers Securities -- Analyst

OK. So -- so you -- you spent the time, got the -- got the bidding and got the award because you just can't officially put it into a backlog because it's not -- because it's --

Joe Bergera -- President and Chief Executive Officer

Yeah, it's not -- it's not showing up. Yeah, it's not showing up as a booking and it's not in our backlog at this point. But it is -- those are sizable deals, particularly at the state level. And so we wanted to make sure that people understood that we did receive those awards.

They're not in our book -- reported bookings number or our backlog number for the December 31 period.

Mike Shlisky -- Colliers Securities -- Analyst

Got it. And -- and again, just looking --

Joe Bergera -- President and Chief Executive Officer

And it will convert to revenue.

Mike Shlisky -- Colliers Securities -- Analyst

Yeah, I just -- just have -- just try and look at it from a -- from over versus prior year or the prior quarter, there was a little of this type of business last quarter and in the prior year, is that correct?

Joe Bergera -- President and Chief Executive Officer

That's correct. Yeah. Yeah. I mean we try to be very explicit when -- when we differentiate between awards and task orders or bookings.

And the only notable IDIQ that we recently announced is -- was that of the FHWA contract extension. Occasionally, we'll also win similar contracts in Texas, but we haven't done so recently. And these two deals in Florida we thought were notable and we wanted to make sure that people were aware that we had won those awards.

Mike Shlisky -- Colliers Securities -- Analyst

Got it. OK. I will leave it there for now. Thank you so much, Joe.

Joe Bergera -- President and Chief Executive Officer

Sure. Thank you.

Operator

[Operator instructions] We'll take our next question from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good afternoon, guys. Just one follow-up for me here is so based on the -- the segment guidance you gave, kind of mid-teens growth percenters, mid single-digit si -- systems. Does that include the TrafficCast acquisition?

Doug Groves -- Chief Financial Officer

Yes, it does.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

So if I assume kind of the $14 million, break that down by quarter, it implies negative low single-digit organic growth in Q4, is that correct?

Doug Groves -- Chief Financial Officer

On the -- on the base business, we're expecting it to be about flat and maybe possibly down just depending on timing on a couple of big orders that we're working on.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Gotcha. And then --

Joe Bergera -- President and Chief Executive Officer

And, Ryan -- and, Ryan, just to -- Ryan, just as a reminder to -- I mean we've got a couple of things that are working against us in this particular period. One is the overall environment, which we talked about. But also, I just wanted to re -- restate that we have a very unusual comparable due to a sizable amount of revenue recognition which occurred in the prior fourth quarter, and that was due to simply to timing on a number of large projects where we ended up hitting milestones. And we -- therefore, these were fixed price -- fixed time, fixed price deals.

And so we ended up taking all that revenue in the period. And also, recognizing all that contribution margin, there was no expense associated with that revenue in the prior year. So we -- we have a very unusual comparable. I just want to make sure everybody understands that.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

All right. Thanks, guys. That's it for me.

Operator

[Operator instructions] We'll pause a moment to assemble the queue. It appears there are no further questions in our queue. I'll turn the conference back to Joe Bergera for any additional or closing remarks.

Joe Bergera -- President and Chief Executive Officer

Super. I appreciate that, Op -- Operator. Thank you very much. We appreciate everybody's support and the thoughtful questions.

This is a very complicated period. And I -- we've done our best to try to explain the puts and takes and to answer various questions. But we're always happy to take additional questions from investors, and so we encourage people to reach out to us anytime if you have specific questions. Additionally, I wanted to note that we will be presenting at the GMP Securities Technology Conference taking place from March 1 through March 2.

And if you're participating at that conference, that's a great opportunity to schedule a visit with us and we hope to hear from you. In the meantime, we're continuing to work very hard through this dynamic period and we look forward to updating you again on our continued progress when we report our fiscal 2021 fourth quarter and our full-year results. And with that, we'll conclude today's call. Thank you again, everyone.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Todd Kehrli -- Investor Relations Contact Officer

Joe Bergera -- President and Chief Executive Officer

Doug Groves -- Chief Financial Officer

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

Mike Latimore -- Northland Capital Markets -- Analyst

Joe Osha -- JMP Securities -- Analyst

Mike Shlisky -- Colliers Securities -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

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