Iteris Inc (ITI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for your patience, and welcome to the First Quarter 2007 Iteris, Inc. Earnings Conference call. My name is Fab, 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. Jim Miele , Chief Financial Officer. Please proceed, sir.

Thank you, Operator, and welcome to the Iteris first quarter conference call. I'm Jim Miele, the Chief Financial Officer of Iteris, and I am joined today by Jack Johnson, the company's CEO. First, I'd like to recap the results for the fiscal 2007 first 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 the participants that during the course of this 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 that 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 are 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. 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. Iteris, Inc. is a leading provider of traffic vision systems and vehicle sensors, that enhance driver safety and optimize the flow of traffic. Our solution [is] leveraged proprietary object recognition software and transportation engineering expertise, to provide innovative solutions for the intelligent transportation systems market.

In the first quarter, Iteris reported net sales and contract revenues of 13.8 million, compared to 12.1 million in the same quarter of the prior year, for an increase of 14.4%. The increase from the year-ago period, was primarily the result of a 21.9% increase in Roadway Sensor revenues, and a 14.5% increase in transportation systems consulting revenues. Roadway Sensor revenues were 6.5 million in the quarter, compared to 5.3 million in the year-ago period, while Transportation Systems consulting revenues were 5.2 million for the current quarter, which is up from the 4.6 million reported in the year-ago period.

Automotive Sensor revenues were 2.1 million in the current quarter, compared to 2.2 million reported in the year-ago period. Gross profits for al three of our business activities for the current quarter were 41.4% of net sales and contract revenues, which is relatively consistent with margins reported in the previous two quarters, and down from 44.3% in the year-ago period. Gross profits from our product business were down to 44.7% compared to 50.1% in the year-ago period. The decline from the year-ago period is primarily related to a shift in resources to roadway sensors sustaining engineering activities from R&D development activities. Gross profits in our consulting business increased 120 basis points from 34.8% to 36%, mainly as a result of our continued focus of higher margin contracts and a favorable contract mix.

Operating expenses for the first quarter decreased by approximately 12.3% to $5 million from 5.7 million in the year-ago period and decreased as a percentage of sales from 47% to 36%, mainly as a result of decreased research and development activities, partially offset by increased SG&A expenses. R&D expenses decreased by 42.6%, largely as a result of higher-than-anticipated costs than the year-ago period from the company's Automotive Sensor business unit, expended significant development resources in qualifying the next generation LDW unit with Mercedes, as well as R&D activities in Roadway Sensors related to new product launches and improvements.

Selling, general, and administrative expenses increased by 4.5%, largely as a result of increased sale to marketing costs to support the growth in our Roadway Sensors and Transportation Systems. We reported operating income of $745,000 for the current quarter compared to an operating loss of $318,000 in the first quarter of the previous fiscal year for an increase of approximately 334%. During the last call, we indicated that the Delta litigation was set for a July trial date. This is a longstanding dispute between a now defunct subsidiary of Odetics, our former parent company, known as Mariner Networks, and Delta Networks, Inc. dating back to 2001.

We were able to settle the case with Delta shortly after the trial began. The settlement provides for a cash payment of 125,000 to Delta in October of this year, and payments of approximately 9,700 per month over the next three years. In addition, Delta is also receiving our Iteris stock worth approximately $212,000. While we are not pleased with the size of the settlement, the payments will not have a significant impact to our cash flow, and the dilution to our shares will be minimal. We are currently in discussion with our lender to ensure that the settlement is in compliance with provisions of our credit facility.

The good news is that as far as we know, this is the last of the parent company legacy issues, and we should be able to move forward, unencumbered by the past. We expect some additional legal costs to impact our second quarter financial results, after which we do not anticipate any further income statement impact from this matter. Inclusive of this settlement, we reported net income for the first quarter of 279,000, or $0.01 per share, compared to a net loss of 726,000, or $0.03 per share, for the first quarter of the prior year. Net income was positively affected in the current fiscal year by a tax benefit of 610,000, [reported] in recognition of deferred tax assets related to our federal and state NOL carry forward , which totaled approximately 50 million.

Finally, as of June 30, 2006, we had 3.5 million borrowed on our credit facility, with availability of roughly 600,000. The increase in the line of credit is mainly related to the growth we experienced in the first quarter. 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. I would also like to point out that our credit facility expired on July 31, 2006. Our bank has extended the terms through August 31, while we negotiate the annual renewal of the line.

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

Well, thank you, Jim. I'm really, really pleased with the financial results for the first quarter. Sales were up 14% from a year ago and operating income was up over $1 million. A terrific start on the guidance we gave for the year of 11% to 14% growth and solid profitability, and I was particularly pleased with the strong growth in the infrastructure part of the business. And, we've made some important progress in AutoVue, as well, as we continue to expand and diversify our customer base.

Roadway systems set a new record of 6.5 million in sales, beating a previous record of 6.1 million that we set only last quarter. We're seeing strong growth in the West and Midwestern regions, and customers have been very receptive to our recent new products, eAccess, and our color cameras. Gross profits remained strong, and we are adding to our sales and support staff.

The market dynamics look very favorable for above-ground detection, and video continues to be the technology of choice. Budget conditions at the federal, state, and local levels also look very good, as agencies seem to have both the motivation and the money to spend in our transportation infrastructure. We believe that a lot of this demand, of course, has been driven by the Transportation Bill that was passed by the U.S. Congress, last August, which provided a 30% increase in transportation funding, and we expect this six-year bill to drive demand for the next several years.

Now, those same market dynamics have also been a boon for our Transportation Systems business, where revenues were up over 14%, year-over-year, to 5.2 million. New contracts awarded for the quarter were over 6 million, and backlog increased to 16.6 million as of June 30, 2006. Now, we're currently in the midst of bidding on some major new awards that we expect to drive backlog up considerably higher over the next few quarters. Just three of the larger bids that we are working on and believe we have a favorable chance to win, add up to over $25 million worth of business, so we're very bullish in what's going on right now, not only the market conditions, but our position relative to the market.

We have additionally been very successful in recruiting new associates, which positions us to execute on these newer awards. We've also made some excellent progress on automotive sensors, that has significant implications, I think, for our future. We just announced today our largest aftermarket fleet sale to date with Old Dominion Freight Lines, which is planning to deploy AutoVue in its 4,400 heavy trucks with installation at 1,200 units within the next six months. Old Dominion, they're classic, well respected, less-than-full truckload carrier, represents an important penetration into the mainstream of the market as opposed to, let's say, the early adopters. We believe that other traditional carriers will be favorably disposed towards our technology with -- now that Old Dominion has stepped up.

On the truck OEM side, we went into production as an option with another major OEM which manufactures an estimated 40,000 heavy truck per year. We also went into development -- this was development with another large OEM which manufactures approximately 20,000 of these types of trucks. So, that means that we are currently in production or development with 8 of the top 12 major North American and European truck OEMs. By the way, of the four major OEMs we are not working with, we are selling an aftermarket offering on two of those trucks. Remember, now, our objective is to be the dominant player in this market and we take steps, every quarter, some of them quite subtle, to achieve that goal and we continue to make steady progress overall.

There is another opportunity that we should talk about. We noted in the press release that a major Asian truck OEM is planning to deploy our system in the near future. We are well along in the development stage with this OEM right now and the volumes being discussed would be quite significant and would actually make them our largest OEM customer. And while we don't have the current launch date, it is anticipated to be in the first or second quarter in the year 2007.

Now, from a sales perspective, the North American market continues to grow impressively. We registered 150% gain over the prior year. In fact, North America sales exceeded our sales in Europe for the first quarter since conception. Now, part of this is due to our rapid expansion in North America and part of this is due to a decline in sales at Mercedes.

Mercedes purchased over $1 million in spares from us last year as our first generation product prepared to go end of life and over 400,000 of those sales were in the year-ago quarter, and there were no similar purchases in this quarter, nor do we expect significant spare sales for the balance of the fiscal year. So, this combined with the negotiated volume price reduction with Mercedes that we talked about on the last call and some inventory management issues at Mercedes have resulted in a decreased level of sales during the year.

Now, as we work to increase sales volumes, the fundamental relationship with Mercedes remains very strong. We're the only LDW supplier for Mercedes. [Dr. Marowitz], the former Vice President for Mercedes and now a consultant for them, still sits on our Board. Moving on to the car market, we continue to support Valeo as they respond to RFQs, and we believe we're in a strong position with one of the pending procurements. At the same time, we're working with Valeo on several other OEM platforms that we anticipate could lead to significant opportunity. Infinity has now taken 37,000 units and continues to work with us on a next generation product.

Wrapping up on Automotive Sensors, we expect to see continued impressive growth in North America with orders like Old Dominion establishing positive momentum for us, which we plan to capitalize on as we expand our North American sales force to three regions. At the same time, two new European OEMs coming into production this year are expected to have a positive effect and European sales, as well. And lastly, our Lane Departure Warning pipeline for incremental OEM prospects in new countries for the truck market has improved significantly, and we're optimistic about announcing additional customers in the near term.

To summarize, we just finished our second consecutive quarter of strong top and bottom line growth. Our guidance for the fiscal year remains intact. And as Jim has just discussed, we believe we have put the last of the Odetics legacy issues behind us with the resolution of the Delta lawsuit. We believe we are well on our way of establishing Iteris' rapidly growing, solidly profitable company worthy of investment.

That concludes my remarks. We'll take some questions.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed.

Good afternoon and let me extend my congratulations. I wonder, are there any new development programs in the works that would push your R&D expenditures up for the remainder of the year? Or should we expect R&D to be down for the remainder of the year, either on an absolute or percentage basis?

I don't think I could identify anything that would move it significantly either way at this point, Jeff.

Okay, good. And then, what about taxes for the remainder of the year? Should we expect it to be similar to what went on in the first quarter?

We've been experiencing some taxable income growth and we've been able to take advantage of releasing some evaluation allowance on a deferred tax asset. So, we continue to show that growth and operating income. You could expect some similar numbers. It's a very complicated calculation, but keep in mind that the first few million of taxable income is offset by the NOL and the [inaudible] NOL. So, I would say generally yes.

Okay. And then, in terms of Old Dominion, it sounds like over the next two quarters, you're going to be shipping about 1,200 units. Is that right?

That's right.

Okay, that's great. And then, I think you mentioned or maybe alluded to some other fleet wins or are there any other fleet wins that are likely to happen in the near term that are like that that could also boost your businesses in that area?

Well, frankly, we're on an active basis, working this thing actually on a daily basis. So, frankly, I expect this to get more new fleet business, certainly by the end of this current quarter. I mean, I wouldn't be surprised if some of it ships within the quarter and I think probably the large bulk of the units that we have just sold to Old Dominion will also ship during the quarter.

Okay. And then, in terms of the major Asian OEM that you're working with, you said that that could probably your biggest OEM in the market or so far. And when did you say that those would potentially start shipping?

Some time in either the first or the second quarter. We're not sure yet. This OEM is bringing out a new truck. They're planning on making our feature a standard in certain versions of that truck. And because it's a new truck introduction, the exact start date for new deliveries is still moving around a little bit but from what we hear, it looks like it's probably going to be in the first quarter.

Okay, great. And then, what do you think the chances are that the -- I think you mentioned that there are two other truck OEMs that you're selling to in the aftermarket -- what do you think the chances are that those two decide to design you in?

Well, I think that -- okay, I can't name them but I believe that one of those two will and the other one, I suspect not.

Okay. And then, just one other thing. In terms of your line of credit, I know you're in negotiations or you're at least working on that right now. I'm just wondering if you might actually see that line being increased or if you expect it to remain the same.

Well, we're -- I can't really comment on the specifics, but let me just say that as our asset base grows, namely receivables that are eligible from a lending perspective, and inventory, it's possible that we can take advantage of that, and given extended credit facility.

Okay. And then, one final question which is -- are there any changes that you guys have noticed in terms of the competitive landscape in your respective businesses since the last conference call?

I can't think of anything that has really happened that would change the basic dynamics that we have. We're still, I think, positioned for a terrific year. I'm very excited about the top line growth, and frankly, I don't see anything that's going to get in the way of that, and we're really impressed and pleased about the bottom line, too. We made more profit in the first quarter, than we made all last year, and we've had two successive quarters of really nice gross in profits. So, I'm real pleased with where we're at, and I don't see the competitive situation changing in the near future.

Okay, that's great to hear. Thanks very much, and good luck.

Thanks.

Thanks, Jeff.

[OPERATOR INSTRUCTIONS]

There are no further questions in the queue. I would now like to turn the call back over to Jack for closing remarks.

Okay. Well, if we have no further questions, we will close the call. Thanks, very much.

Thank you for your participation in today's conference. This concludes the presentation. You may disconnect. Have a wonderful day.

Thank you.

You're welcome.