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Iteris (ITI -1.47%)
Q1 2023 Earnings Call
Aug 04, 2022, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Iteris Incorporated fiscal first quarter 2023 financial results conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Kehrli of the MKR group. Please go ahead.

Todd Kehrli -- Investor Relations

Thank you, operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris's financial results for 2023 first fiscal quarter ended June 30, 2022. Joining us today are Iteris's president and CEO, Mr. Joe Bergera; our company's CFO, Mr.

Doug Groves. Following the remarks, we'll open the call for questions on the company's covering outside analysts. 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 is not undertaking an obligation to provide updates to these forward-looking statements in the future.

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Actual results may differ substantially from what is discussed today, and no one should assume that at a later date, the company's comments 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 forward-looking statements. As always, you will find webcast replay of today's call on the Investor section of the company's website www.iteris.com. Now I'd like to turn the call over to Iteris's president and CEO, Mr.

Joe Bergera. Sir, please proceed.

Joe Bergera -- President and Chief Executive Officer

Great. Thank you, Todd, and good afternoon to everyone. I appreciate all of you joining us today. As a reminder, we completed the sale of our Agriculture and Weather Analytics segment to DTN LLC on May 5, 2020, therefore, reporting the results of that segment as discontinued operations for all periods presented in today's earnings announcement.

I'll be discussing only our continuing operations for the remainder of this call. The company reported fiscal 2023 first quarter total revenue of $33.7 million, representing a 1% decrease year over year. The decrease is fully attributable to supply chain challenges that prevented us from shipping, and recognizing $4.9 million in first quarter revenue on Vantage sensor backlog. If not for the supply chain challenges, first quarter total revenue would have increased 13% year over year to $38.6 million.

To avoid confusion, I want to be clear that we did not lose the $4.9 million of Vantage orders. Rather these orders slipped to the right, and we've already started to fulfill some of the $4.9 million of backlog in the second quarter of fiscal 2023. I'll discuss our supply chain exposure and the status of our supply chain mitigation program in more detail in a few minutes. Despite supply chain challenges, the customer adoption of our ClearMobility platform, remains very positive.

And we continue to strengthen our leadership position in the highly fragmented smart mobility infrastructure management market. In the first quarter we reported record total net bookings of $42.6 million, representing an 18% increase compared to the same prior year period. This brings our trailing 12-month total net bookings to a record $162.1 million, representing a 31% increase relative to the same prior period. For your reference, our trailing 12-month bookings figure does not include a very large opportunity in front of us with the Infrastructure Investment Jobs Act or IIJA.

Under the IIJA, federal funds will flow to local entities through either formula funding or grant funding. As we've said, since the IIJA was signed into law on November 15, 2021. formula funding will begin to show up in state and local budgets in the first fiscal year after the law went into effect. For most state and local entities, that'll be October 1, 2022.

With respect to grant funding, U.S. DOT has not issued any intelligent transportation systems-related grant funding under the IIJA to date. The first tranche of grants will be in support of the U.S. transportation's Safe Streets for All Initiative, meaning, they must meet the criteria of this initiative.

These grants won't be awarded until late this calendar year or early next. At this time, various state and local entities have included pricing from Iteris in their grant applications. Due to sustained record total net bookings, we ended the June 30 period with record total ending backlog of $109 million, representing a 36% increase year over year and a 9% increase on a sequential basis. As always, our reported total net bookings and ending backlog figures reflect firm customer orders.

Of our $33.7 million in fiscal 2023 first quarter total revenue, 49% was recorded as product revenue, and 51% was recorded as service revenue. Whereas in our fiscal 2022 first quarter, 53% was recorded as product revenue and 47% was reported as service revenue. The mix shift is largely attributable to our fiscal 2023 first quarter supply chain constraints. Fiscal 2023 first quarter product revenue was $16.4 million versus $18 million in the same prior year period, representing a 9% year over year decline.

Again, if not for supply chain constraints, product revenue would have been $4.9 million higher or $21.3 million for the quarter, representing an 18% increase relative to the product revenue in the same prior year period. The impact of our January 1, 2022 Vantage sensor price increase was de minimis in the first quarter due to the time lag from quote to order. Therefore, first quarter product revenue and unshipped sensor backlog, reflect an increase in underlying unit demand. We continue to experience above the market levels of demand for our sensors, which have historically set the product performance standard for the industry.

In the first quarter, we extended our product performance lead with the introduction of new artificial intelligence capabilities for Vantage Apex sensors, as well as the introduction of a new health monitoring application, Iteris's Spectra Connected Vehicle Sensors, and for third-party roadside units. Because of our relentless focus on superior product performance, we continue to win virtually every large competitive resource to intersection detection, fixed travel time sensor, and cellular V2X modernization initiative across the country. For example, in the first quarter alone, we were selected for the following notable modernization initiatives. A Mississippi DOT Phase 1 hurricane Zeta restoration program, a Florida DOT Phase 1 regional Intercity Integrated Corridor management program, a Colorado DOT rural intersection modernization program, and Arlington, Virginia Phase 2 modernization initiative, and a Pasadena, California Phase II citywide intersection modernization program.

To maximize customer loyalty and consolidate our market share as much as possible in the first quarter, we had to source key components in the secondary market for a total of $5.6 million. The cost of these components range from two times to more than 100 times their normal cost. To manage the impact of global supply chain challenges and renormalize our business model, we devoted substantial management attention in the first quarter to implementation of our supply chain mitigation program, which you'll remember we reviewed on our prior earnings call. During the quarter, we made significant headway toward overcoming these issues.

More specifically, we completed the design of three alternative circuit boards to reduce our dependency on specific chipsets going forward. All these boards are in different stages of testing at this time. We expanded our broker network from 3 to 10 partners, giving us direct access to major brokers in every major electronics market worldwide. We moved the reporting line for supply chain and manufacturing under Doug Groves, to create various efficiencies and accelerate lean process automation and improvement.

We sourced and appointed a new strategic hire to lead and enhance our supply chain and manufacturing organization, as well as reduce our reliance on outside consultants that you remember we engaged earlier this calendar year. This strategic hire reports directly to Doug Groves. And we continue to build buffer inventory for key components that drove a planned $5.3 million increase in inventory, and will help to unlock our Vantage sensor backlog in future quarters. As Doug will further discuss, we expect inventory levels to normalize, as we complete the related supply chain mitigation plan.

I'll discuss the next stages of our supply chain program in a few minutes. And in the meantime, I want to review the performance of our service lines of business. Fiscal 2023 first quarter service revenue was $17.3 million versus $16.1 million in the same prior year period, representing a 7% increase year over year. As a reminder, we recognized two forms of service revenue.

First, there is annual recurring revenue from our Software as a Service, Data as a Service, Platform as a Service, and managed services offerings; and second, we have project-based revenue that is associated with our consulting activities. Our first quarter annual recurring revenue was $9.4 million, representing an increase of 14% year over year and representing 58% of our total service revenue. The growth in ARR is mostly attributable to adoption of our SaaS product lines such as ClearGuide, which substantially outpaced the rate of growth of our managed services portfolio in the period. While our ARR revenue line experienced solid growth, our first quarter project-based revenue was flat year over year due to indirect supply chain constraints.

For example, some large projects for which we function as a systems integrator or the program manager, were delayed because certain third parties could not deliver critical equipment through the project schedule due to their own supply chain challenges. While this is frustrating and may continue for the next few quarters, our exposure is limited to a small number of projects, and we've identified and are taking action to mitigate these disruptions. In the first quarter, we recorded $22.1 million in net service bookings, of which 71% of the net service bookings will be recognized in the future as annual recurring revenue. Again, 71% of the net service bookings will be recognized in the future as annual recurring revenue.

Additionally, we executed several large contracts that will convert to future bookings. Some notable recent customer agreements include a multi-year contract with the Virginia Department of Transportation for Traffic, Traveler and Road Infrastructure Program, or what we call TTRIP services. This contract has a minimum value of $20 million. We expect the actual value will be approximately $70 million.

We recorded a $1.8 million booking against this contract in our first quarter. Secondly, we received a $4.2 million task order from the San Francisco Bay Area Metropolitan Transportation Commission to extend the use of our advanced traveler information system, ClearRoute. Third, we recorded a multi-million dollar contract extension to provide clear data to a large U.S.-based broadcasting company. Fourth, we received a $2.7 million task order for the Bay Area MTC to extend our managed services activities.

Additionally, we received more than $1.2 million in combined task orders for ClearGuide and more than $1.1 million in combined task orders for our commercial vehicle operations software. And finally, we received a contract with a large multi-line insurance company to transition a clear data proof of concept into a production deployment for four states. To support our platform-centric business model and our aggressive solutions road map, we completed a restructuring in the first quarter to drive better alignment across our software and sensor portfolio, to enhance our resource utilization, accelerate the development of ClearMobility Cloud and support our continued organic and inorganic growth. In addition to the aforementioned benefit, this reorganization will produce an annualized cost saving of approximately $1.2 million to help offset material cost increases, until we begin to realize the full benefit of our supply chain mitigation plan.

In summary, customer response to our ClearMobility solutions road map continues to be very strong, resulting in record first quarter total net bookings, as well as record total ending backlog. Although supply chain constraints prevented us from shipping $4.9 million of our first quarter Vantage sensor backlog, we believe that Iteris continued to outperform our competitors in a difficult environment, and we made good progress implementing our supply chain mitigation program, which will begin to produce financial benefits in our second quarter. Before I elaborate on those forward expectations, I'd like to turn the call over to Doug to provide some more color on our first-quarter financials.

Doug Groves -- Chief Financial Officer

Thank you, Joe. Good afternoon, everyone. As a reminder, please see the company's 10-Q filing and press release which are posted on our IR website for a further description of matters under discussion during the call today. As Joe mentioned, and as we expected, we continue to face several supply chain challenges again this quarter, that impacted both the top and bottom line results.

We anticipated these challenges, and we continue to see certain components that were not available through our normal channels. To that point, we spent approximately $5.6 million in inventory purchases from the secondary market, i.e., brokers, which resulted in incremental material costs of $2.4 million in the quarter, which was up from $2.1 million in Q4. From a revenue standpoint, there continue to be approximately six core components within our Vantage sensor product family that we could not source in the quantities we needed from any suppliers, and the cost of many components continued to be up to two times to 100 times their normal cost. This prevented us from manufacturing all the circuit board assemblies necessary to fulfill about 30% of the Q1 Vantage Sensor shippable backlog, or approximately $4.9 million in product sales that slipped out of the quarter.

If we had all the components we needed, the year-over-year revenue growth would have been 13%. As Joe mentioned, we have many ongoing initiatives to improve the situation. However, we do not expect there to be continued supply chain pressure. We do expect that there'd be continued supply chain pressure over the next few quarters before we realize the full benefits of these initiatives.

On the bright side, demand for our products and services continues to be strong as evidenced by our record bookings of $42.6 million and record backlog of $109 million. Now, I'll move on to the details of the first quarter results. Total revenue for fiscal 2023 first quarter decreased 1% to $33.7 million compared to $34.1 million in the same quarter a year ago. Our gross margins in the first quarter decreased 1,110 basis points to 30.2% compared to 41.3% from the same quarter last year.

As previously mentioned, our revenue was constrained due to the unavailability of certain components, and the gross margin pressure was due to the higher cost for those components that were available. Turning to our revenue mix. The product revenues decreased 9% to $16.4 million, compared to $18 million in the same quarter last year. Taking into account the $4.9 million of revenue that was not recognized because of component shortages, the product revenue growth would have been 18% quarter over quarter.

This clearly underscores our market-leading position in the sensor market, as we continue to take market share from our competitors. Product gross margins declined 1,820 basis points and were 28.8% compared to 47% for the same quarter last year, due to the supply chain cost issues mentioned previously. On a normalized basis, excluding the supply chain cost issues, the gross margins would have been 43.5%, which is about the same as the historical average of about 44% to 45%. Our service revenues increased 7% to $17.3 million, compared to $16.1 million in the prior year quarter, primarily driven by stronger software sales.

In the first quarter, 28% of total revenue was annual recurring revenue, which was up from 24% in the same prior-year quarter. As a reminder, our annual recurring revenues are comprised of our software and managed service revenues. Service gross margins decreased 360 basis points to 31.4% compared to 35% from the same quarter last year. This was primarily due to increased labor costs, the timing of certain contract extensions and the contract mix.

Operating expenses in the first quarter were $15.1 million compared to $13.4 million in the same prior-year quarter. G&A expenses were once again flat quarter over quarter, while R&D was up about $400,000 as we continue to invest in building out the ClearMobility platform. Sales and marketing increased $600,000, which was related to some key investments in our sales and product support organizations to support our expected double-digit future revenue growth and record bookings. We reported a GAAP operating loss in the first quarter of $5 million compared with a GAAP operating income of $700,000 in the same quarter a year ago.

The operating loss was driven by the shortfall in product revenue of $4.9 million -- $2.4 million, and incremental product inventory costs and $700,000 in restructuring charges. We expect the restructuring charge to reduce our ongoing costs by about $1.2 million over the next four quarters. The GAAP net loss from continuing operations in the first quarter was $4.9 million, or a loss of $0.11 per share, which compares with the net income from continuing operations of $600,000 or $0.01 per diluted share in the same quarter a year ago. Adjusted EBITDA for the first quarter was a loss of $2.5 million or 7.3% of revenue, which compares to the positive EBITDA of approximately $2.5 million or 7.4% of revenue in the first quarter of last year.

The GAAP operating loss, GAAP net loss and adjusted EBITDA loss were all driven by the product revenue shortfall, restructuring charge and supply chain issues previously noted. With the supply chain mitigation plans outlined by Joe, we anticipate a progressive improvement in our supply chain position beginning in our second quarter, with the majority of the improvement occurring in the second half of our fiscal year 2023, since it will take time for the redesign of all the key circuit boards to ship through to our customers. We will complete the redesign and deployment of three circuit boards in Q2, and expect to complete the redesign and deployment of another three circuit boards in Q3 and again in Q4, respectively. These key redesign activities should return the product gross margins to about 40% by the fourth quarter of this year.

Now turning to liquidity and capital resources. Cash equivalents were $14.8 million at the end of the first quarter, and net working capital was $31.8 million. The $8.9 million decrease in cash and cash equivalents quarter over quarter was a result of the net loss, a planned increase in inventory of $5.3 million to build buffer stock as part of our supply chain recovery plan, and the repurchase of $900,000 in company stock. As previously mentioned, we procured $5.6 million in components from the secondary markets, so we were unable to get any extended payment terms, which is normal business practice in these markets to offset the inventory carrying costs, and this also negatively impacted our working capital in the quarter.

With the increased volume of the inventory purchases in Q1, we do not expect to see such a large increase in inventory in Q2 or the remainder of the year. However, we do expect to still be constrained by the 6 key components previously mentioned, until the redesign of all the remaining circuit boards is completed. Lastly, we spent $188,000 in purchases of property and equipment in the first quarter, which was up from $67,000 in the prior-year first quarter. This increase is simply a timing difference, and we still expect the full-year capex to be less than 1% of revenues, reflecting our asset-light business model.

So in summary, we continue to be laser-focused on our supply chain challenges. As Joe mentioned, our multi-point plan is progressing well with the redesign and deployment of another three circuit board assemblies in Q2 as part of our mitigation plan. We've already begun buying materials for new designs. So we are confident we can weather the supply chain storm and come out even stronger on the other side with multiple circuit board designs for our market-leading Vantage center products, and without sacrificing any features and functionality that our customers have come to rely upon.

So with that, I'll turn the call back over to Joe. Joe?

Joe Bergera -- President and Chief Executive Officer

Super. Thank you, Doug. So despite the global pandemic and associated supply chain disruptions, Iteris continues to enhance its position in the large dynamic and highly fragmented smart mobility infrastructure management market. This market represents significant opportunities due to favorable secular trends, as well as historic new investment flowing from the IIJA.

Iteris's market access, know-how and platform-based strategy, provide degrees of freedom and optionality that most companies in our market lack. As a result, we remain very optimistic about the opportunity in front of Iteris, and believe the current environment actually improves our ClearMobility value proposition and competitive position as demonstrated by sustained above-market bookings growth, despite some near-term disruption from supply chain constraints. In fact, the leading indicators we track, suggest continued execution of our solutions road map, which we outlined on our last earnings call, should sustain future market share growth. For example, the total value of qualified sales opportunities is up 20% year over year, and our proposal win rate has increased over 200 basis points to reach a new record high.

Due to the strength of our demand side performance, management is able to remain focused on the execution of our supply chain mitigation program that will unlock our historic backlog, and begin to renormalize our cost structure. To that end, we've identified the following near-term supply chain mitigation program objectives, some of which Doug has already mentioned. First, we'll begin in our -- in the second quarter, the production and shipment of the three circuit board prototypes for which the designs were completed in Q1; second, we'll develop three circuit board prototypes in Q2 for production and shipments beginning in Q3; third, we'll complete the development of a final set of three additional circuit boards in Q3 for production and shipment beginning in Q4. Fourthly, we'll continue to build 9 to 12 months of buffer stock for key supply chain components.

We should reach that level by December 31 of this year. Fifth, we'll accelerate our lean manufacturing initiatives to drive more efficiency and effectiveness in all our manufacturing and supply chain processes. And six, we'll implement an additional, more surgical price increase effective October 1. We'll average about 10% across our Vantage sensor portfolio.

Our plan should meaningfully improve our supply chain position, as we progress through fiscal 2023, even if the broader global supply chain environment remains largely the same as current conditions. In other words, we're insulating ourselves from broader global challenges. More specifically, we expect the revenue benefits to begin to bleed through our Vantage sensor revenue line in our fiscal 2023 second quarter and our gross margin line in our fiscal 2023 third quarter, as we rotate through our inventory of secondary market components. Based on our current record backlog and anticipated future bookings growth, we should resume our year-over-year revenue growth in our fiscal 2023 second quarter, and we continue to forecast fiscal 2023 total revenue of $147 million to $155 million, which would represent full-year organic growth of 13% at the midpoint of the guidance range.

Likewise, we expect a successive step up in EBITDA margin dollar performance starting in our fiscal second quarter, as our supply chain mitigation program begins to produce progressive benefits. As a result, we continue to forecast full-year adjusted EBITDA that should fall within a range of 5% to 6% of full-year revenue. So in closing, our fiscal 2023 first quarter was extremely challenging, as it has been for most public companies that have reported this period. That said, our supply chain mitigation program offers a clear pathway for Iteris to navigate this difficult period, and we are very pleased with our execution of this program.

Additionally, we believe that sustained, high level of market demand validates our platform-centric strategy and represents the potential for significant shareholder value as outlined by our Vision 2027 operating model. So with that, we'll conclude our prepared remarks, and we'd be delighted to respond to your questions and comments. Operator, do we have any questions at this time?

Questions & Answers:


Operator

[Operator instructions] Our first participant -- our first questioner is Mike Latimore from Northland Capital. I'm sorry, this is Mike Shlisky from D.A. Davidson.

Michael Shlisky -- D.A. Davidson -- Analyst

Some of the products and sensors that were delayed or were not shipped at the right time -- I'm just curious if some of the risk there. Are you under deadlines in those contracts to have them in by a certain date? Do you have penalties if you don't deliver on time, or you had to go back to the customer and ask for any kind of changes to the additional contracts?

Joe Bergera -- President and Chief Executive Officer

The answer is no. There are certain instances where we may have specific delivery dates. But in this particular period, we don't have any risks of that nature. And regardless what -- the kinds of issues that we're facing, are being faced by virtually every participant in the market right now, and so all of our customers are extending substantial latitude.

So as I said in my remarks, all of our orders are firm orders. In some cases, there may be some delay in terms of when they're going to be shipped, but we will ship all the product. We have not had any orders canceled, and there aren't any penalties that we would be responsible for.

Michael Shlisky -- D.A. Davidson -- Analyst

My other question is about the infrastructure build past -- a couple of quarters ago. I'm curious, have you seen any customers with money to spend from that bill? Or do you have any feel for when you might start to see some new projects with funding from that build roughly hit the RFP market?

Joe Bergera -- President and Chief Executive Officer

Sure. Yes. So as I mentioned in the call that the infrastructure bill that I think you're referring to is the Infrastructure Investment and Jobs Act, which was signed November 15 last year. At the time that was signed, we told everyone that they shouldn't expect any funds to begin flowing from the IIJA down to the state and local level until the next fiscal year for the respective local entity.

We're just starting to see state and local jurisdictions begin their new fiscal year. In most cases, that new fiscal year will start on October 1 of this year. And so we would expect that formula funding will begin to show up in their budgets at that point in time. Formula funding, by the way, can get mixed in with other funding.

So it's difficult in some instances to know precisely what the underlying source of the funding is. The other form of funding is going to come in the form of grants. And as I also mentioned, the grant funding is being doled out in a series of tranches. The first tranche is associated with U.S.

Department Transportation Safe Streets for All initiative. And there's currently a call for proposals right now. The call for those proposals or the window is going to close on September 15. And we expect that there will be approximately three- to six-month period for various grant applications to be evaluated for money to be dispersed through those brands.

So the answer to your question is that, I don't believe anybody in the ITS market has seen any funding from the IIJA show up at this point, but we do expect to see that start to happen in the fall, and we expect to see it accelerate as we move into the next calendar year. And by the way, as I also mentioned on the call, I want to make sure that nobody missed it, is that, as a vendor, we're not able to submit a grant application ourselves. We have to do that in cooperation with the state and local agency, or in some instances with a public university that's authorized to submit grant applications. And as I said, we provided pricing to several state and local agencies, as well as universities, to support their grant applications.

And so we would certainly expect that we'll benefit from the grant applications as they're awarded later this year.

Operator

Our next question comes from Mike Latimore from Northland.

Mike Latimore -- Northland Securities -- Analyst

So I guess just on the EBITDA guidance for the year. You're reiterating the EBITDA guidance for the year start off with a little bit lower first quarter. I think you're talking about 40% gross margin sort of exiting the year on hardware now instead of 45%. So should we think of it -- you're making up a difference here just on some opex savings?

Doug Groves -- Chief Financial Officer

That's correct. As we've been echoing, the G&A should be flat this year, as it has been in this last quarter over quarter. And so we should see some pickup there. And then, the margin will be a reflection of how fast we can get the new circuit cards into the product and ship to the customer.

So I think the combination of both of those gives us the confidence to keep the EBITDA guidance where it's at.

Mike Latimore -- Northland Securities -- Analyst

And should we think about reaching positive EBITDA in the second or third quarter here?

Doug Groves -- Chief Financial Officer

Sure. So definitely by the third quarter -- our plan is to try and get there by the second quarter, but it's going to be a function of the flow-through of these expensive components that we bought at the tail end of the first quarter. So that will -- some, but maybe not all of that will filter through to the second quarter. So I think our plan is to try and get there, but we'll have to see how the products' shipments go.

Yes.

Mike Latimore -- Northland Securities -- Analyst

And then, regarding the IIJA, do you have a sense of how much the budgets of your customers will expand because of this? Is this like a increase of 20%, increase to 50%? Any sort of way to quantify how much more resources your customers will have for your type of products?

Joe Bergera -- President and Chief Executive Officer

Yes, Mark. That's a great question. So the formula funding is called formula funding for a reason. And basically, the money gets allocated based on a number of predetermined criteria which would be like GDP, local jurisdiction, revenue that flows to the federal government, and then it comes back on a percentage basis, and the overall population, the number of road miles, among other factors.

And so, given those criteria, as you might expect, California, Texas and Florida are expected to receive the largest share of the formula funding under the IIJA. That being said, those states also have the largest transportation budgets to begin with. There are -- some smaller states on an absolute basis will receive less. But since their budget is less, it may on a percentage basis, have a larger impact.

And so, you need to really look at it state-by-state based on the specific formula. And then also relative to what the current funding level is in each of those states in order to understand what the uplift is going to be. But that being said, I think most executive directors of the various state departments of transportation are expecting that over the approximate 5-year funding window, the IIJA could increase our total funding by as much as 20% to 40%. Now, just to be clear, the IIJA has a lot of components to it.

A lot of it is actually directed toward things that are right in Iteris's wheelhouse. But there's certainly some funding that's going to go to like brick-and-mortar construction-type projects, which would have only a peripheral benefit to Iteris. But the bottom line is this is a huge infusion of funding. And we expect it to last for a substantial period of time, and we're doing everything that we can to maximize our share of that $1.2 trillion in federal funding.

Mike Latimore -- Northland Securities -- Analyst

And then on the Virginia deal. You talked about it. I think you said $20 million initially, could go to $70 million. So I guess just starting with the $20 million, is that -- how much of that is sort of incremental to what you're already doing there? And then what's the catalyst to get you to that 70% level? And I guess, third, how much of your kind of sort of software-as-a-service is involved there?

Joe Bergera -- President and Chief Executive Officer

Yes. All really great questions. So the TTRIP program includes some activity related to the Commonwealth ATIS system, which I think you're getting at. We already hold that contract.

And so, by winning the TTRIP contract, we preserve the work we're already doing, that ATIS work that we're already doing for the Commonwealth. I would guess probably -- to be totally transparent, the majority of the $20 million will -- is arguably replacement revenue, because we currently are generating a meaningful amount of revenue from the Commonwealth related to the ATIS program. But I would say that the potential additional $50 million, the most of that -- and that's over a five-year period. But I would say that that represents upside, or that'd be incremental new revenue.

Mike Latimore -- Northland Securities -- Analyst

So what additional services would you be providing in that $50 million?

Joe Bergera -- President and Chief Executive Officer

So this is a fantastic contract. The -- as I've mentioned on prior calls, we're seeing that due to a variety of factors, including the general migration of all state agency activities to the cloud, including infrastructure management activities to the cloud, and then also related cybersecurity issues, that virtually every state -- the governor's office is mandating that the state CIO needs to be involved in the selection -- the evaluation, selection and even management of the technologies for all the various departments, including the transportation department. So what that means in the case of Virginia is that the state CIO office was very involved in this particular contract evaluation process that we went through. And to be honest, it took a lot longer to win this contract than we had expected because of the Austin CIO involvement in the contract evaluation process.

But the upside to it is, this is the only contract related to Department of Transportation activities in Virginia that's authorized by the CIO office, and that also is authorized by the Federal Highway Administration. And as a result, it gives us a wide hunting license to pursue a huge range of technology-related activities across the Commonwealth. So I'm not going to go into the specific details, but we are extremely excited to hold this contract. No other vendor has a similar contract to date, and we expect to see similar contracts being awarded by other states going forward.

Mike Latimore -- Northland Securities -- Analyst

Right. So it will be good reference account for sure.

Joe Bergera -- President and Chief Executive Officer

Fantastic reference account. This is a really important contract. As we've talked about in the past, we've been very focused on ensuring that all of our technology meets the requirements of the CIO offices of various states because this is a phenomenon that we're seeing happening across the country. This is the first major contract of its type, and we're extremely excited to have won it.

Mike Latimore -- Northland Securities -- Analyst

That's great. Does the -- any of the IIJA funding helped us? Or is that -- is this independent of that?

Joe Bergera -- President and Chief Executive Officer

It's a great question. So as I mentioned, this contract is federalized, meaning -- and not very many contracts are, meaning that it was not only approved by the Virginia Department of Transportation and the Commonwealth CIO office, but it was also approved by the FHWA, meaning that federal funding can flow directly from the U.S. Department Transportation or FHWA. Through this contract [Inaudible] performed various activities.

So it does mean that we are likely to receive IIJA funding through this contract because it is federalized, but it's not explicitly called out in the contract.

Mike Latimore -- Northland Securities -- Analyst

And then just last on the price increases. So can you just remind me -- I think you had one already and you're going to do another one. And can you just talk a little bit about which products are getting the price increase when they should hit revenues and gross margin?

Joe Bergera -- President and Chief Executive Officer

Yes. For sure. So the first price increase was across the board 10% increase on all of our Vantage products. As I've mentioned, there is a delay between like preparation of our quote, submission of the quote and the actual fulfillment of the order.

And so, we're only beginning right now to see any impact from the 10% across first price increase that went into effect on January 1. We were pleasantly surprised that we didn't see a lot of pushback to the first price increase. And I think it's due to the fact that our products are just so highly differentiated from a future performance perspective, that we can -- we've always had a premium price in the market, but we were able, especially in these circumstances, to take that additional price increase without any real customer pushback. In light of the current supply chain challenges -- and our customers are well aware of it, and considering the strength of our market position, we feel that we have the latitude to take an additional price increase to cover continued supply chain costs.

This second price increase would go into effect on October 1. So it's 10 months after the first, unlike the first. So it's not going to be across the board. We're going to take potentially more than 10% increase on some components, and then perhaps probably less on others, but it should average out to about another 10% increase across the portfolio.

Obviously, we're not going to get into specifics about which components we're going to increase most at this point. But I will say that the additional price increase will go into effect on October 1.

Mike Latimore -- Northland Securities -- Analyst

And I guess just last one for me. ARR grew 14%, I think you said. And I think the goal is to grow that at one and a half times to two times overall company growth rate? Or can you just remind us on kind of what the goal is there? And what the prospects already getting there this year?

Joe Bergera -- President and Chief Executive Officer

Yes. Doug, do you want to talk about that?

Doug Groves -- Chief Financial Officer

Sure. Yes. So -- your memory is good. That's right.

I mean, we were expecting the ARR to grow at one and a half times to at least two times what our normal total revenue growth rate is. And as Joe alluded to in his comments, in our service bookings, the majority of those bookings in the service line were all ARR. So we're seeing the backlog build and the bookings come in to be able to support that, as you probably know, because the software piece of ARR, that takes a while to bleed in because that's generally you get 160 generally speaking, when you sign that contract and get it going. So it's going to take a while for it to ramp.

But that's still our expectation to get the ARR north of 30% to 35% in the next couple of years.

Joe Bergera -- President and Chief Executive Officer

And, Mike, you may recall that I noted in my comments that 14% growth included proportionately higher growth on our SaaS product lines and less growth on our managed services product line, and that was due to timing. We've got big -- some big managed services contracts, and so there can be some timing impacts and that drags down the total rate of growth for our annual recurring revenue. But our software which isn't subject to those kind of big timing effects, was very, very healthy for the period.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Todd Kehrli -- Investor Relations

Joe Bergera -- President and Chief Executive Officer

Doug Groves -- Chief Financial Officer

Michael Shlisky -- D.A. Davidson -- Analyst

Mike Latimore -- Northland Securities -- Analyst

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