Iteris Inc (ITI) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2006 Iteris earnings conference call. My name is Colby and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today's call, Mr. Jack Johnson, CEO and Mr. Jim Miele, CFO. Mr. Miele, please proceed, sir.

Thank you, Operator, and welcome to the Iteris third quarter conference call. I'm Jim Miele Chief Financial Officer of Iteris and today I'm joined by Jack Johnson, the company's CEO.

First I'd like to recap the results for the fiscal 2006 third quarter and then Jack will provide some further comments about our business. At the conclusion of Jack's comments we'll open the call for questions.

Before proceeding I'd like to remind all of the participants that during the course of the call we may make forward-looking statements regarding future events or the future performance of the company.

The forward-looking statements that we discuss during the call are based upon the information we currently have available. This information will likely change over time. By discussing our current perceptions of the market and the future performance of the company and its products we're not undertaking an obligation to provide updates in the future. Actual results may differ substantially from what we discuss with you today, and no one should assume that at a later date our comments from today will still be valid. We refer you to the documents that the company files from time to time with the SEC, specifically the company's most recent Form 10-K and Form 10-Q.

These documents 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. If we use any non-GAAP financial measure as defined by the SEC and Regulation G in any earnings conference call or other financial presentation, you will find a schedule of the most directly comparable GAAP financial measure and a reconciliation between each non-GAAP financial measure used and the most directly comparable GAAP financial measure in the Investor Relations section under Other Financial and Statistical Information on the company's website.

Iteris Inc. is a leading provider of traffic vision systems and vehicle sensors that enhance the driver safety and optimize the flow of traffic. Our solutions leverage proprietary object recognition software and transportation engineering expertise to provide innovative solutions for the intelligent transportation systems market.

For the third quarter Iteris reported record -- excuse me, Iteris reported net sales and contract revenues of 12.2 million compared to 11.7 million in the same quarter of the prior year or an increase of 4%. The increase from the year-ago period was primarily the result of a 6.2% increase in revenues related to automotive sensor products and services, an 18.6% increase in Systems Consulting revenues.

Automotive Sensors revenues were 2 million in the current quarter compared to 1.9 million recorded in the year-ago period while Consulting revenues were 4.9 million for the current quarter, which is up from the 4.1 million recorded in the year-ago period. The increase in Automotive Sensors revenue was the result of a 19.6% increase in product sales of lane departure warning units to the heavy truck market fueled by continued growth in both Europe and North America. Jack will discuss the Automotive Sensors business and the heavy truck market opportunity in greater detail during his comments.

The 18.6% increase in Systems Consulting revenues was a result of stronger California market. Our Roadway Sensors video detection business recorded revenues of 5.2 million for the current quarter and 16.4 million year-to-date which is down 3.1% year over year. Management believes the decline in revenues is primarily a result of certain project delays. Jack will also discuss the Roadway Sensors business segment in further detail.

Gross profits for all three of our business activities for the current quarter were 41.2% of net sales and contract revenues, which is down from 43.1% in the year-ago period.

The decrease in gross profits is primarily the result of two things. Number one, in Q3 of the prior year product gross margins were positively impacted by sales of sample LDW units for which we recognize higher than normal margins.

And secondly Consulting margins in the current quarter were negatively affected by a change in our accounting treatment for holiday pay. Despite the decline in the current quarter gross margins for the nine-month period ended December 31st, 2005 were 43.2% for all of our businesses compared to 42.1% in the prior year.

Operating expenses for the third quarter decreased by approximately 72.1% to 4.8 million compared to 17 million in the year-ago period, noting that the prior-year quarter included a non-cash stock based compensation charge of 11.5 million related to the assumption of stock options by the company in connection with the merger between Iteris Inc. and its former parent, and 422,000 related to the disposal of fixed assets.

Operating expenses in Q3 of the prior year, excluding these charges, would have been 5.1 million. We reported operating income of 263,000 for the current quarter compared to an operating loss of 12 million in the third quarter of the previous year. This marks the first time since the merger of the company into its former parent that we have recorded operating income on a GAAP basis. Adding back non-cash charges for stock-based compensation, amortization of intangible, in-process research development and deferred compensation savings plan expenses, our pro forma non-GAAP operating income would have been 313,000 compared to a loss of 13,000 in the prior-year quarter.

I would like to refer you to the table which is attached to the press release announcing our financial results which reconcile the company's GAAP operating losses for the third quarter ended December 31st, 2005 to pro forma non-GAAP operating income. The reconciliation can also be found in the Investor Relations section under Other Financial and Statistical Information on the company's website.

We reported net income for the third quarter of 136,000 or a break even per share compared to a net loss of 12.2 million or a loss of $0.44 per share for the third quarter of the prior year.

For the first 9 months of fiscal 2006 year-to-date net sales and contract revenues were 37 million or an increase of 5.9% compared to net sales and contract revenues of 34.9 million in the first 9 months of fiscal 2005. Pro forma non-GAAP operating income for the 9 months was 603,000 again excluding non-cash charges compared to operating income of 1.2 million for the corresponding period in the prior year. I would again direct your attention to the table provided as an attachment to this release.

Lastly, during the current quarter the company finalized negotiations with its senior lender and amended our existing credit facility which includes a $5 million line of credit and a term note payable with the remaining balance of approximately 3 million which will be paid in full by May 2008.

As of December 31st, 2005 we had 1.4 million borrowed on the line of credit with availability of 1.9 million. We believe our line of credit together with cash provided from the company's operations will support our operations and provide the needed working capital to continue to expand and grow our businesses.

Now I'd like to turn the call back over to Jack who will discuss our strategy and the quarter in greater detail.

Okay thanks a lot Jim. As Jim noted for the third quarter we grew the top line over last year and substantially increased profitability and this is something I'm real pleased about. This is the first time we've been able to report both positive operating income and net income since we did the reconsolidation transaction in October of 2004. So I'm very pleased with that and the overall trend towards bottom-line performance.

And we also generated over $900,000 of cash since the start of the year. The growth was driven by our Systems Consulting business which has rebounded impressively from last year when it was beset by Federal and California budgeting issues that all of you who have been on the call are aware of. Q3 revenues were 18% higher from the prior year, and we now have a $15.4 million backlog in Systems which is up nearly 18% over last year.

Further evidence of this growth trend in this market is the substantial increase in contracting activity among major departments of transportation, and we expect to capitalize on this increase in activity with some major contract announcements in the next few months as money from the new Federal Transportation Bill and California infrastructure spending start to be awarded.

We've been positioning ourselves to take advantage of this by adding to our staff as new business layers on, and as most of you know this is a very scalable business.

Our Roadway Sensors business has always been the primary profit driver at Iteris and that trend continues. The business is solidly profitable despite a significant investment in R&D spending this year that has enabled us to achieve significant product development milestones which are positioning us for future growth.

Gross profits, up by 4 percentage points as a result of cost reduction efforts and a better product mix. We've introduced two important new products, eAccess which enables high level connectivity including streaming video between intersections and traffic operation centers, and the next generation of our mainstay Edge processor which has more processing power and yields some healthy margins and we believe will drive further adoption.

In addition we're about to introduce our next generation camera which offers --which also offers improved performance and maintains some attractive margins for us.

Sales, however, are down about 3% year-to-date primarily caused by project delays and some dealer performance issues. One of the steps we've taken is to move from a distribution model in the State of California to a direct sales model through a manufacturer's representative in the State. Right now we're extremely pleased with the initial results. Had a much stronger sales pipeline at a higher pricing with better margins.

We've also found that this has created a much closer relationship with our customers. All of these activities should bode well for our Vantage business and we anticipate back towards more traditional growth rates in the future.

Our Automotive Sensors business continues to make impressive gains. Truck sales are up 60% over last year at the third quarter mark and North America aftermarket sales are up over 300%. This is in spite of the fact that we lost some momentum in the third quarter due to the delays in the model changeover associated with bringing our next generation unit into production with Mercedes.

Most specifically we estimate the delays resulted in approximately 350K to 450K of lost sales during the quarter. Now that we're over the line with Mercedes we expect the changeover process will move faster with OEMs like MAN and Freightliner, but we will probably see some residual effects in the fourth quarter for that.

The business opportunity in the world of commercial trucks is evolving into a very tangible growth conduit and is worth spending a few minutes with on this call. Every year the U.S. and European truck OEMs produce between 400,000 and 500,000 Class A trucks and these are the tractors of the 18-wheelers that we all see on the road every day.

Now this is a significant market opportunity in its own right but the total commercial vehicle market for our lane departure warning product is actually much larger than that. You see the average truck lasts between 7 and 8 years on the road and these trucks can be retrofitted with lane departure warning during major scheduled overhauls. This means that the aftermarket opportunity is in essence actually much bigger than the new truck market -- truck opportunity itself.

We believe that our target market opportunity for new and used trucks to be in the neighborhood of approximately 2 million trucks annually, and that a conservative initial goal for market penetration would be in the neighborhood of let's say 10%. In fact Iteris is the only qualified supplier in this market with 7 of the top 12 truck OEMs representing approximately two-thirds of the North America and European market either offering our product or preparing to offer our product. And we're currently pursuing this business with the other 5. So given how well we are currently positioned I think you can you see why we're so excited about the truck market.

Now here's some key milestones which we're focusing on over the next 12 months to enable us to sustain and grow our dominant market position. First, qualify MAN and Freightliner on the new unit and get into production. Release the new North American aftermarket unit for production. Qualify four more truck OEMs on the unit and get into production and release the new European aftermarket unit for production.

So we've got a lot on our plate. It basically it boils down to a lot of, you know, new -- new partners coming on line with us in terms of the new OEMs and an increased opportunity to penetrate the aftermarket in Europe where we're having a new product come out, and the new North American unit as well.

In parallel with these activities we'll be adding to our direct sales force, evaluating partnering opportunities, and putting together an aggressive marketing awareness and sales campaign. As a result of these initiatives during the past 2 years, 24 U.S. heavy truck fleets have selected the Iteris LDW system to date collectively representing an estimated 10,300 vehicles. In addition testing of our LDW system continues with 47 heavy truck fleets which represent up to 100,000 vehicles.

Sales to fleets help drive sales for both new production as well as--as well as after-market sales. Anyway I'll keep you posted on these activities in future calls specifically relating to the truck market.

In the meantime we are seeing some very positive signs in the car market as well. Even though this market has not developed as quickly as any of us would like the lane departure warning feature in the car market is seeing an increase in interest. Two major OEMs are expected to have RFQs out by the end of the quarter. There are two other OEMs who are doing their homework for an RFQ as we speak, planning which vehicle and how to implement it. So these are all the kind of signs that we've been looking for to show that LDW is going mainstream.

Competition is taking notice as well. We've seen that the major tier 1 suppliers are trying to get on board with the growing number of RFQs. You know the largest barriers to entry are development time and money and the variety of lane markings found worldwide. Iteris is headquartered in the heart of some of the world's worst lane markings coupled with one of the largest highway systems making for an ideal development environment, and also some tough barriers to entries for other.

We're also the only company that has production experience with lane departure warning in Europe and in North America. Iteris continues to stay one step ahead by innovating complementary features to lane departure warning and leveraging our proprietary Vision technology. We're adding vehicle tracking to our list of features. In addition to tracking lanes on the road this means that we work on detecting and tracking vehicles that surround the driver, and it increases the driver's awareness of his surroundings. So these will be features like warning the driver that they're following too close, collision mitigation, automated cruise control support, and blind spot warning are just some of the applications that can build upon our vehicle tracking capability.

Royalty revenues for the units that Valeo manufactures for Infiniti were $84,000 during the quarter which is a 50% increase over the average of the previous two quarters. To date approximately 24,000 units have been shipped to Infiniti.

You know I'd like to remind everybody that our royalty-based business model in the passenger cars market does not translate into revenue growth as quickly as in the direct model. Now as you know the royalties we earn on sales of lane departure warning units is confidential so I can't go into a lot of detail here but let me just say that regarding direct sales it would have had a meaningful impact on our top-line growth if we had gone to market through more traditional channels. That being said we're very happy with the Nissan relationship and they appear to be very happy with us as well. As such we continue to discuss other vehicles and other applications for technology in their vehicles.

Regarding the financial guidance we have given previously for the fiscal year ended March 31st, 2006, sales are likely to grow in the area of 7% instead of the 10% we had predicted. This was primarily driven by the delays in qualifying the next generation AutoVue truck unit and less-than-expected sales at Vantage due in part to the issues we discussed earlier. But the rest of the guidance remains intact.

From an overall financial perspective I'm very optimistic as we look into the future. All of our businesses are poised for growth as we start to see the effects of the new transportation funding on systems and in Vantage. There's Vantage new product introductions that are lined up. Our success in positioning ourselves to dominate the very large truck market opportunity while still expecting the car market to evolve into a significant business as well.

At the same time we have improved our profitability and cash flow as well on our way to establishing the sound financial footing, which will serve as the basis for growth, and profitability in the years to come.

Now that concludes my prepared remarks. We'll now take some questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Sid Parakh with the The Robins Group. Please proceed.

Hey good afternoon guys.

Oh hey Sid.

Have you given out the product sales number for the truck market?

Could you, could you repeat that Sid, you didn't come through?

Have you given out the product sales number for the AutoVue segment?

You know we haven't given that out yet. We said that they would--it grew 19.6% year over year, excuse me, quarter over quarter, and 59.8% year over year but that number will be included in the Q to come out shortly.

Okay also can you talk a little bit more about say the Vantage part of the business where you've said in California you've moved from a dealer model to a direct sales model? And also if you could help identify how much was California in terms of your Vantage revenue?

In California is probably a little bit--you know, right around 10% of our volume for Vantage comes out of California, perhaps a little bit more than that. And what happened in California is that we had an under-performing dealer who had some credit issues which ultimately led to, we felt, him not being able to fully exploit the market opportunity. We actually that sales in California ought to be a lot higher than in the neighborhood of 10%. So we made a change with this dealer where we have evolved into a direct model. We're now working with a manufacturer's rep who is very well known in the industry, and frankly I couldn't be happier with the change.

I understand.

Seeing the sales pipeline fill up very nicely, and I think we're going to turn and look back at this and say this was one of the best decisions we've made.

Okay and when did you initiate this change?

The actual notice date, I believe, was sometime in November.

Yes, late November.

Okay so you haven't really seen the full impact on say Vantage sales from this transition yet?

No we haven't.

That's correct.

Okay now can you talk a little bit more, I think you mentioned that two major OEMs were expected to have RFQs out soon. Can you just talk a little bit more about that and there say you think say Iteris' position as far as those OEMs go?

Well, you know, we're certainly--we're certainly contenders I think at both. We expect competition. These are relationships that we have been involved with for a long time, and they know us and they know us well. And there's always a lot of factors that go into these competitions. You know we expect that we're going to do pretty well. I'm sure the other guys feel the same way. We continuously pound on the advantages that we have which is we're the only guys in production, and our unit works honestly incredibly well in U.S. road conditions, which is a big market for any of the big auto OEMs. So from our perspective we ought to win them both and we're very excited about it and we're working hard with our partner Valeo to win the business.

And also, I mean, have you had say any discussions with these customers, and what I'm trying to get to what you are saying about the performance and stuff is that based on what, the impressions within those companies are?

Yes they -- they come back and give us very, very strong reviews on the performance of the system, no question about it.

Okay and how important do you think pricing will be a factor in this? Is it purely a performance--?

It's always a factor. I think it's always an important factor. There's no question about it. These OEMs are driven by pricing. So it's a very important factor.

Okay also can you talk a little bit more about say Nissan. It sounds like the royalty revenue shot up and I guess the number of units was also up significantly. Is it, I mean, what do you attribute this to, better adoption rates or I mean can you just clarify that?

I think we're -- we're gaining momentum there. And they seem to like the product a lot and they haven't given us their latest penetration statistics. But the overall volume that Valeo is shipping is up. So we're really happy about that.

Okay and then finally one question and I'll probably get back in the queue. You mentioned that there were about 350,000 or 450,000 in sales that got pushed out. Now is that an actual push out or do you think that sort of goes away?

No, you know what? It's one of the unfortunate things that I think that they had a situation where they had trucks that were waiting for units, and we had the qualification problems that we had and ultimately Mercedes decided that they just needed to ship the units and we lost those sales.

So those are not sales that moved to the right. Initially they had some discussion of actually putting enclosures in the units and subsequently retrofitting them. But when they actually looked at it, it turned out to be too complicated for them so they weren't able to do that.

Okay and this was early on in the quarter then?

There was actually a period from let's say mid-September to mid-November where we were just unable to ship to Mercedes. It lasted a period of about 2 months.

Okay and I'm assuming those problems have been taken care of?

Yes, well we're shipping to them now. But obviously, you know, to us every, every one of those sales was like blood. And it was very disappointing to be in that position. I guess the encouraging thing is, is that the demand is clearly there. Our growth rate would be considerably up for the quarter and for the company as a whole if we hadn't had that problem. But it is what it is. And we've talked about it in previous calls that getting through the qualification with Mercedes was an issue. They had over 200 separate requirements that we had to be in compliance with and it just took longer than we thought.

Okay and so I mean so I'm also assuming at the same time then that there is no more shortage of units or are you still sort of seeing some of that?

You know right now we're going through--I think as I said earlier the next--right now we're going through the same process with MAN. Now they're a smaller customer but they've also been out of units and I expect to see some residual effects in the fourth quarter because of -- we've been out of production with them also.

Okay, all right. Thank you.

Thanks Sid.

Your next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed.

Good afternoon. I wanted to ask you a little more about the delays for -- associated with the, I guess you're calling it Roadway Sensors particularly with Vantage. What, what really triggered the delays there and then I guess what happens now in order to get that business back on track?

Yes well this is -- this one I think is a little bit different than the situation that we we're just talking about with AutoVue. Sales for Vantage have been essentially flat this year and one of them really rests at the feet of this dealer who we think was substantially under-performing. But there was a couple of other dealers who just had some major opportunities, moved to the right on them. And they're still out there, and we're still in there pitching for them but they didn't happen this year. And so that -- that's kind of what happened on the dealer front.

Do you think it's a--is it a situation, Jack, where the orders went to somebody else or do you think it was just--?

No, no they haven't gone to anybody else. They just have not been bid. You know one thing about Vantage is I can't tell you that I'm happy with the growth rate for this year but one of the things that I don't think anybody should overlook is that we've increased gross profits by four percentage points. And that's equivalent to roughly $850,000. And at the gross profit rate we had last year that would have been equivalent to about $1.9 million in sales or about 10 points of growth.

So I think we shouldn't overlook the fact that -- that Vantage is a solid performer, delivering some very nice gross profits and is really the profit engine for the entire business. And I believe firmly that we're going to see that Vantage business rebound.

Okay and then if we can shift to the Systems business for a minute as far as looking forward on that should we expect the Systems revenue progression to be fairly smooth or is that one that we could see kind of a lumpy progression going forward?

And in other words are there some large deals that you might be working on in the pipeline where we could see a little bit of a spike there?

I think that it -- you don't tend to see the Systems business spike that much. Probably, roughly around 80% of our revenue is driven by work that we do in-house with about 20% subcontracting. I think where you'll see the spike is I think you'll start to see the backlog start to spike over the next several months. And I think you'll see sales rise steadily. It's not a real lumpy business and that's one of the things we like about it because we tend to have great visibility in that business. And it's very predictable and it's very scalable.

And you said, Jack, the backlog was 44 million or was that your total company backlog?

No, no I think that's an error. Right now the backlog is 15.4 million in Systems.

Okay.

And that was against roughly 17 point something last year in sales so that's up 10% or so this year. But obviously a considerable part of sales is covered by backlog.

Okay and then as far as the--as far as the truck market looking at that with the deal that didn't happen or I guess the order that couldn't be filled with Mercedes did they use a competitor or did they just skip without?

No, no not at all. There isn't any competitor, Jeff, that's the beauty of this whole thing.

Right.

There is no competitor.

And there's really--.

And if you heard what I talked a little bit--I tried to give a little framework on what the opportunity in trucks looked like including the aftermarket roughly 2 million units per year potential. And that's the beauty of it. We've got 7 of the top 12 OEMs in this market. The other 5 don't have an LDW supplier yet and obviously it's our objective to be that LDW supplier. And this market has lots of room to--to grow and I honestly believe that a 10% penetration rate is not unrealistic.

By the way we didn't just make that up. Our current penetration within Mercedes is roughly 10% of the Class A trucks that they sell in this environment. And so I think that's a real number.

And it would be kind of hard--I take it, it's still difficult for another--another competitor to enter the market and really take significant market share?

Yes I really believe that. Obviously there's--there's 5 of them that we still don't have out of the 12 and we're working to get those. But let's just talk about the 7 that we do have. The planning cycles in this area go 4 and 5 years out. So I honestly believe that the business that we have today we're still going to have in 2010, and I think that's very significant. That's how you drive growth in profits at Iteris is being able to dominate what looks like a really large market opportunity in the truck business.

All right. Okay good, and then as far as the RFQs you mentioned that are coming up over the next couple of quarters is it a situation where--have you identified who you think you're going to be competing with at this point and you know, or you have a sense of what the pricing parameters might be? Or is that vague at this point?

Well we pretty much know who we're going to be competing with and the pricing metrics are honestly--they're always a crap shoot.

Okay so is it a situation where you guys will concede a little bit on price in order to win the business or is it--I mean I guess I'm just trying to get a sense of how you're looking at that?

Yes well that's really Valeo's call. Obviously we try to influence Valeo.

Right.

It's one of the reasons that--that we're on the royalty model. We talked a little bit earlier about if we'd actually been on the distribution--if we'd have been on the direct sales model like Valeo is our top-line growth this year would have been well above 10% and everybody would have been happy about that. But they might have been a lot less happy when they looked at the bottom line because as part of the deal we got all the risk taken off our shoulders and they assumed all the risk and all the cash flow.

But Valeo makes that call and obviously we encourage, we encourage Valeo to be aggressive and we know the customers well so--I think we do a pretty good job of figuring out what a winning number should be. But Valeo makes the final call on that.

Jeff, this is Jim. Just be reminded there is a--there is a floor on the royalty so even if Valeo were to give the product away they still owe us a minimum royalty. Now we haven't disclosed so built into our agreement with Valeo is some protection from them having to discount their price to the OEM.

Okay well that's good to know. All right, I will get back in the queue. Thanks very much.

Okay.

Your next question comes from the line of Eric Swergold with Gruber & McBaine. Please proceed.

Yes hi it's Eric Swergold at Gruber & McBaine.

Hi Eric, how are you doing?

Good I've got two questions on the truck market. One thing I'd like to square up is you said your target penetration is 10% what you've got with Mercedes but at the same time you've got two-thirds of the top truck OEMs so it would seem to me like that 10% penetration number has got plenty of room to move up?

Oh yes. Well wait now I want to make sure I understand your question. I mean, look, the penetration with the others obvious is pretty nominal at this point. You know Mercedes is our largest customer. We've been with them the longest. I'm not sure if you're asking do I think 10% penetration is conservative or what?

Well that's my question, yes. Ten percent appears to be very conservative.

Yes, you know, there's some interesting data points on that. For instance, right now in Germany we're at--we're at 20% with Mercedes. We're at 50% in--in Switzerland. We're at 100% in South Africa. So, I mean, this leads me to believe that there's a lot of--a lot of opportunity for growth above 10% and I believe once you apply it across the whole market that turns out to be a very large opportunity for us.

And then can you give us the unit price range on those truck units so that we can figure out what the dollar market value size is?

I really can't. You know that it's under disclosure. I mean it's under non-disclosure and frankly we have people who listen to these calls that we would not want to know what our price is.

Okay thank you.

Okay.

Thank you, Eric.

Your next question come from the line of [Chris Byles] with [CJB] Capital. Please proceed.

Hi guys, I have a question about the line of credit. It looks like the quarter ended, end of December, you guys renegotiated the line of credit to 5 million?

That's right. Really, we really renewed the line of credit with those guys at Wells.

Okay so it looks like you had drawn down 1.4 million with availability of 1.9 but that doesn't quite add up to 5 million. What am I missing?

Well the total availability on the line is 5 million but it's formulaic.

Based on eligible assets. So we can be anywhere between 4 million and 5 million at any given time. Excuse my voice, I'm a little bit under the weather.

No problems so?

So it doesn't necessarily always add to 5 million, and one of the--excuse me--changes in the line was to include in the calculation of availability the term note and then we got some credit. It's kind of a confusing calculation. But the term note that we owe Wells and the line of credit it all wrapped up into one facility now. And the formula to calculate availability has slightly been changed.

But at the end of the day we borrowed 1.4 million. We had availability of almost 2 million on the line and that's what's really important.

So Jack was talking earlier about some of the growth and some of the--some of the growth initiatives and in talking about adding sales and adding personnel I mean is this an adequate number for you or do you need more money.

Well I think right now it is, and I think that -- I think the opportunity here within the truck market is something that could change that dramatically as--as we get traction there. I think we have to be alert to the possibility that at some point the market may really be--may be really ready to take off and we've got to make sure that we're ready for the ride. So I think, as we look at the coming fiscal year, we're planning on adding some sales folks and starting to focus more on a marketing campaign. I think there might come a point where the opportunity looks so good and so close that we might want to do that. But I don't think the time is yet, Chris.

And if we just consider that for a second what's our--what's your preferred way of doing that? I mean do you go back to Wells at that point? Do you do an equity financing? Do you, I mean, what are your options?

Well obviously it's always that do you do or do you do equity? And of course each one of them has a cost at the time that you're doing it.

Right.

And I think, I always feel like debt is cheaper than equity so I kind like to go there. But having said that we've got--we've already got some debt on the balance sheet that I'd like to see go away. One nice way to do it would be to get the stock up to the point where the convertible debentures trigger. So it's a fairly complex equation that we're just going to have to deal with when we get there.

Okay thank you. Good luck.

Okay, thanks Chris.

Your next question is a follow up from the line of Sid Parakh with the The Robins Group. Please proceed.

Hey just a few more questions.

Hey, sure Sid.

Now you've talked about some complementary technologies a way to tracking and stuff. I mean what sort of a timeframe are we looking at there?

Oh I think, Sid, that's a great question and I think the timeframe on these things is that you could see some of this stuff out there I would say probably--well you can see some blind spot warning that's out there in--in a very, very short period of time. You know that ACC is--is already a feature and we're looking at an enhancement to that. I think just looking over the list that we talked about I think most of these things are anywhere from let's say 2 to 5 years out.

Okay so none of this is any--I mean in the near term. Now one other question on the same front is will you offer say blind spot detection or stuff like that even on the truck versions or will it just be for the car market? Whenever you do it?

Well, Sid, we've not committed to doing blind spot detection yet. That's one of the opportunities that we have because we can do vehicle tracking. But I think that a lot of these are very appropriate within--within the truck market too. I think following too close is a--is a big problem in the truck industry because of the tremendous momentum that they have. Collision mitigation is an important one. Dr. Marwitz who is on our board from Mercedes talks about that all the time, and I think those two especially are very important in the trucking industry.

Okay also one other thing that you had mentioned last quarter was you were increasing your spending on R&D but somehow, I mean, if I see the R&D expenses quarter over quarter they've actually gone down?

Sid there might have been a misunderstanding in that because I think if you look at the R&D spending we said we were increasing it in fiscal year '06, okay, which is the fiscal year that we're in.

Right.

So if you look at fiscal year '06 you will see that it has increased pretty dramatically from '05. However, it has--it has peaked and is starting to decrease a little bit.

So should we anticipate the same say another step decrease down in the current quarter as well?

You know I don't think so.

Well the guidance we gave was that we'd be roughly 30% over last year. I'm hoping that holds so you can get to the number that way, and we've given out that guidance on the last call, and Jack kind of pulled down the revenue guidance a little bit. All the remaining guidance remains intact.

Okay, okay. Now can you just go over the revenue guidance as well?

Okay well we said we expect to finish up the year in the area of around 7% over last year.

Okay, okay and can you give me the number of say cash flow from operations?

Yes sure, cash from operations for the 9 months was greater than 900,000 and most of that was driven in this last quarter. We reported I believe 41,000 of positive cash from operations through the 6-month period and then in this last quarter we saw a large increase of 900,000 so the number is roughly 940 for the 9-month ended which was very exciting from our standpoint.

And that was due collections of receivables and managing the inventory and it was a very positive impact. Part of the reason why the line of credit balance has been reduced to 1.4 million.

Right okay. All right, thank you guys.

Okay, thanks Sid.

At this time there are no further questions in queue.

All right then thanks very much, and we'll look forward to talking to everybody at the next call.

Bye bye.

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