Iteris Inc (ITI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iteris, Inc., fiscal year 2007 second quarter earnings conference call. My name is Cammie, and it will be my pleasure to be your operator today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to the Chief Financial Officer, Mr. Jim Miele. Please proceed, sir.

Great. Thank you, Cammie, and welcome to the Iteris second-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 of the fiscal 2007 second 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 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 solutions leverage proprietary object recognition software and transportation engineering expertise to provide innovative solutions for the intelligent Transportation Systems market. For the second quarter, Iteris reported record net sales and contract revenues of 14.5 million, compared to 12.7 million in the same quarter of the prior year, or an increase of 13.8%. The increase from the year-ago period was primarily a result of a 20% increase in Roadway Sensor revenues, an 8.5% increase in Transportation Systems consulting revenues and an 8.5% increase in Automotive Sensor revenues.

Roadway Sensor revenues were a record 7 million for the quarter, compared to 5.8 million in the year-ago period, while Transportation Systems consulting revenues were 5.1 million, which was up from the 4.7 recorded in the year-ago period. And, finally, Automotive Sensor revenues were 2.4 million in the current quarter, compared to 2.2 million in the year-ago period.

Gross profits for all three of our business activities for the current quarter were 41.2% of net sales, which is relatively consistent with margins reported in the previous two quarters and down slightly from 42.8% in the year-ago period. Operating expenses for the second quarter deceased by approximately 12.4% to 4.8 million from the 5.5 million reported in the year-ago period and deceased as a percentage of sales from 43.3% to 33.4%, mainly as a result of decreased research and development expenses.

R&D expenses decreased by 43.7%, largely as a result of higher-than-anticipated cost in the year-ago period, when the company's Automotive Sensor business unit expended significant development resources in qualifying the next generation Lane Departure Warning unit with Mercedes, which continued from the first quarter of last year, as well as R&D activities in Roadway Sensor systems related to new product launches and improvements.

Additionally, in the current year, some R&D resources have been shifted to product support activities, which is recorded as a cost of goods sold rather than an R&D expense. We reported operating income of 1.1 million for the current quarter, compared to an operating loss of 66,000 in the second quarter of the previous fiscal year. Operating income for the six months ended September 30th, 2006, was 1.9 million, compared to a loss of 384,000 in the prior year.

This marks the third consecutive quarter that the company has reported positive operating income. We reported net income for the second quarter of 732,000, or $0.03 per share, compared to a net loss of 155,000, or $0.01 per share, for the second quarter of the prior year. Net income for the six-month period was a million, or $0.04 a share, compared to a net loss of 881,000, or $0.03 a share, in the prior year.

Year-to-date net income was positively affected in the current fiscal year by a tax benefit of 591,000, recorded in connection with the recognition of deferred-tax assets related to our federal and state NOL carry forwards, which total approximately 50 million.

I'd like to turn my attention now to the balance sheet and discuss recent improvements. At the end of the second quarter, the company raised an additional 2 million in cash due to the early exercise of existing warrants granted to a shareholder in 2001. The funds were immediately used to pay down the company's line of credit, resulting in a balance of 577,000 at September 30th. This alone freed up 2 million of immediate availability on the line for working capital purposes.

Subsequent to year end, the company entered into a new two-year $8 million credit facility with Silicon Valley Bank, which replaces the existing $5 million facility with Wells Fargo and the $2.2 million term note, also payable to Wells. Borrowings on the new line are based on eligible receivables and inventory and will be reduced by the amount owed on the term note, which was assumed by Silicon Valley Bank.

I expect both the 2 million in cash and the new credit facility to provide the company with the necessary working capital to continue to fund our overall growth plans and ensure the company can meet its existing financial commitments. Now I'd like to turn the call back over to Jack, who will discuss our strategy and the quarter in greater detail.

Thank you, Jim. I'm very happy with the results of the second quarter. We broke the 14 million sales level for the first time and we did so with a lot of room to spare. Revenues were up notably in each business unit for a combined growth rate of nearly 14% over year-ago quarter and operating income grew markedly from a small loss a year ago to $1.1 million this quarter.

So we've now had three successive quarters of strong revenue growth, coupled with four successive quarters of increased operating income. At the six-month point in the year, we are well on our way to meeting or exceeding the guidance we set for the year of 11 to 14% growth and substantial profitability and, as Jim talked about a few minutes ago, we've also taken some important steps to strengthen our balance sheet and increase our borrowing capacity.

So, in summary, it was a very solid quarter. Sales are up, profits are up. We've got more capital for growth and we're making good progress on all fronts. In Automotive Sensors this quarter, overall revenues were up 8.5 year-over-year and product revenues were up 15%. This was driven by 176% increase in North American sales, which topped the $1 million mark for the first time and were 70% of all of our product sales.

We also achieved several key milestones during the quarter which we expect to have significant long-term implications for us. First of all, Scania and DAF, two of the largest European truck OEMs, formerly announced the launch of the Iteris LDW as an option on heavy-duty truck models, starting in January and March respectively at the Frankfurt Auto Show -- excuse me, the Frankfurt Truck Show.

We will now be offered on five of the seven top European OEMs. It should also be noted that since DAF is part of PACCARS, which also owns Peterbilt and Kenworth, two of the larger US brands, our opportunity to acquire their US business is also significantly enhanced. Iteris also announced the availability of a kit version of LDW which can be installed on an aftermarket basis for heavy trucks in Europe, thereby expanding the size of our market opportunity there.

Cargo Transporters of North Carolina announced it had experienced a 90% reduction in preventable lane-departure-related accidents since deploying the Iteris LDW System in its trucks. This came on the heels of a July announcement by Maverick USA of Arkansas, which experienced a 65% reduction in these types of accidents, along with a positive return on investment in 18 months.

Now, the experience of these two customers, along with the recent announcement made by Old Dominion to deploy Iteris LDW in its fleet of 4,400 trucks is helping to build substantial momentum in the truck market for Iteris. Our objective, as many of you know from previous calls, is to dominate the heavy truck market, which we believe has an addressable market potential of nearly 2 million units per year.

We are currently available as either an option or as an aftermarket kit on 10 of the top 12 North American and European truck OEMs. In addition, 36 US fleets have now standardized on Iteris, with 55 more fleets in test. We expect to be announcing the start of production with our first major Asian OEM within the next several months.

Now, we should note, however, that sales to our biggest customer, Mercedes, will fall short of our expectations due to the factors that I discussed in our last call, and this will make it unlikely for us to meet our expectations for growth in excess of 50% for truck sales in the current fiscal year. Fortunately, the dynamic growth we are experiencing in the North American market, combined with the new business we are bringing in from Scania and DAF and the new Asian OEM will make us less vulnerable to volume differentials from a single customer in the future. Overall, we're very pleased with our progress in the truck market.

Moving on to the car market, which we see as a longer-term revenue opportunity for Iteris, our relationship with Nissan remains strong, and we're in discussions with them regarding other Nissan platforms and are working on enhanced features with them. We and Valeo, our strategic partner, are continuing to pursue opportunities with other major OEMs. In the infrastructure side of our business, money continues to be allocated and awarded at the federal, state and local levels to repair and renew the country's aging transportation infrastructure and Iteris is experiencing a strong uptick in demand for its products and services as a result.

Our Transportation Systems business revenues are up nearly 11% and backlog is up 18% year-to-date. In order to execute on this business, we have added a net of 12 new associates to our team and are aggressively reporting more professionals as we speak. A key win in the quarter was the next phase of the National ITS Architecture contract with the FHWA. The contract value is up to 9.8 million over two years, with similarly sized options for three additional years.

And, in addition, we are in negotiations on another 7.5 million in contracts yet to be signed and have a significant number of other proposals outstanding. We also had a number of major accomplishments in our Roadway Sensors segment, which is our Vantage product. We had record sales of $7 million, which is a 20% increase over last year's quarter. We shipped our 50,000th camera since inception, which we believe makes us the market leader in units shipped.

We have had a very strong reception in the market for our new color camera, which has shipped now over 1,000 units since its introduction in March, and the first revenue shipment of our new four-channel Edge 2 processor, which offers end users four video input channels on a compact and cost-effective platform. This is another industry first for Iteris, by the way.

The success we are experiencing in this business is the result of the investments we've made in the last couple of years for new product development and also in our distribution channels and customer support functions.

In summary, we just finished another fine quarter, with strong top and bottom-line growth. We strengthened our balance sheet and our revenue guidance for the year remains intact and our prospects are excellent in all business segments and we are establishing Iteris as a rapidly growing, solidly profitable company.

This concludes my remarks and we'll now take questions.

Thank you for that update, gentlemen.

[OPERATOR INSTRUCTIONS]

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

Good afternoon, and I just wanted to say, nice work on the quarter.

Thanks, Jeff.

Just a housekeeping question to start. Jim, do you have the depreciation and CapEx in the quarter?

Yes, sure, Jeff. Deprecation was roughly 150,000 and the CapEx was right around 100,000.

Okay, and then I'm just wondering, looking forward, how we should model R&D expenses? Obviously, this quarter was down significantly versus the same quarter last year. Maybe how should we look at that on an absolute dollar basis or on a percentage of revenue basis going forward?

Well, there's a shift in resources, as I spoke about, and we did experience some accelerated expenses getting the next-generation LDW unit available for sale last year, so I would anticipate that, going forward, R&D expenses will be roughly in the neighborhood of 800 to let's just say 1.1 million going forward for the next few quarters.

Okay. And let me ask you, obviously, Vantage had a really strong quarter as well. Do you think that we're going to see the same sort of typical seasonality play out this year?

Well, I think that's a great question, and I think historically, if we look back over the last three or four years, we've actually had our worst quarter in Q3, which is the quarter that we have just started. On the other hand, we're feeling pretty good about the quarter as we speak, and we haven't had any real bad weather that has impacted installations up to this point. So it's hard to talk about with a great degree of certainty, and it's not unusual for us to see some amount of seasonality in the current quarter. And it also affects the systems business because of the fact that we have less billable hours in this quarter due to Thanksgiving and the Christmas holidays and the like.

Having said that, I think if we look at this quarter comparable to the year-ago quarter, I think we're all going to feel pretty good about the results.

Okay, good, and then let me ask you, on Mercedes, I know you talked about Mercedes on your last call. But just wondering there what we could see develop that might get that business turning back around again?

Well, when we were at the Frankfurt Truck Show, we met with the head of sales for Mercedes for Europe and it was an encouraging discussion. And he talked about working more closely with us on a country-by-country basis and we're putting those plans into reality. Over the next several months, we will be meeting with key sales teams in the key companies in Europe which are basically Spain, France, Germany, UK and, to a certain extent, Italy. And so we're -- the relationship itself I think remains very strong and I think Mercedes remains committed to the feature. And so I feel very good over the long term, but in the short term we're kind of suffering through the situation that I talked about last time, where they made a very large purchase of spares last year that is not going to be repeated.

They had some material control issues that caused them to build up some inventory besides that that they were not aware of until, actually, in June of this year and combined with the price decrease that they had earned with their volumes up to that point. So I think we're doing everything we can to get the Mercedes volumes back up, but I think that it's still going to be a significant shortfall this year.

Okay, but, in the meantime, you've got other OEMs you're signing up and I guess, I wonder, is there anything else to talk about there in terms of developments either on the OEM front for trucks or on the fleet side?

Well, I think that one thing that was really gratifying for us is at the Frankfurt Truck Show, you couldn't walk more than a minute on the floor without coming on a truck or a bus that had our LDW System in it. I mean, between Iveco and DAF and Scania and Mercedes and MAN and three different brands of buses, we were all over that show. And, once again, by the way, no competitive late-departure warning systems were on anybody's vehicles.

So we feel really good about that, and another thing that's -- and I mentioned it in my remarks, is the fact that with the Old Dominion announcement, I think a lot of the traditional old-line trucking firms have really kind of taken notice of that. We're seeing an increased level of interest from firms of that ilk, and I think the fact that we now are able to tout some real data from credible sources which are the trucking firms on reductions in lane-departure related accidents is making us feel pretty good and I think making some of our future customers feel more comfortable.

Okay, good. And then, is there anything new developing in the passenger car market as it pertains to AutoVue or any changes on the competitive front there that you guys want to talk about?

There's not a lot that I can talk about. There's a lot going on kind of underneath the surface, and, as usual, there's not much I can say about it. We're still in there pitching on several opportunities that we believe are out there and that's where we do see competition emerging. And, one of these days, we'll see an announcement from somebody else getting some business besides ourselves, but it hasn't happened yet and in the meantime we're still in there pitching with our strategic partner, Valeo.

Okay, fair enough. Thanks very much, and wish you guys good luck this quarter.

Thank you, Jeff.

Thanks, Jeff.

Your next question comes from the of [Frank Meglin] with the Robbins Group. Please proceed.

Good afternoon and congratulations on your great quarter.

Thank you very much, Frank.

I have a couple of questions, to help us understand, you've been qualified on a number of platforms now form OEMs. How many are actually purchasing?

Okay, well, we've got five of seven in Europe.

That's qualified, right.

yes, they are qualified and purchasing. And in the US there is Freightliner and we're also qualified on international and up until last quarter they were actually taking orders for it to be done in a rework facility and apparently there's been a change in policy that doesn't allow them to do that right now.

But we're also, we think, fairly close with PACCAR, which relates to Peterbilt and also Kenworth. We're available on an aftermarket basis, also, on Volvo and Mack.

Can you describe for us the sell cycle or how long it takes the prospective customer to decide they want the unit?

Are you talking about from an OEM perspective or from a fleet perspective?

Fleet perspective.

A fleet perspective, we've really seen it run the gamut. A lot of times the smaller fleets tend to have more flexibility and if you can make the CEO a believer they can move pretty quickly. We've seen some of those move, let's say within -- oh, I would say six months. The bigger the fleet, the more layers of decisionmakers that they have and the less likely that you are to see a decision get made fairly quickly. And, honestly, we've had some fleets that have been evaluating our system for over two years now and they tend to be the larger fleets.

So I guess where I'm coming from is when might you expect a larger ramp up? You've got a good ramp now, but the OEM is offering it but their customer base still has to come to the conclusion they want it.

I think that's a great question, because I personally believe that at some point you get to kind of a tipping point, where if a fleet doesn't have your system, they have liabilities associated with not having an important safety device that's there, but I don't believe that we're at that point yet, and I don't think I could predict when we're going to be there.

But I think when you start to see fleets like Old Dominion stepping up and Prime had stepped up about three months before that, which was also a pretty large fleet, the more of those you get and then if you get one of the really large ones that have in excess of 10,000, I think at some point you get to that tipping point where it accelerates the growth rate, but it's really hard to predict when that happens.

But it's working its way through the system.

Yes, honestly, we're real happy with -- we got kind of a little bit of maybe a disappointment with the volumes at Mercedes this year, but everywhere else in our truck business, we're real happy with how things are progressing.

All right, and then back to the balance sheet for a minute, what is your availability under the line --?

Well, the new line has a total max availability of 8 million, and of course it's based on eligible receivables and inventory and for the first month, because it's calculated kind of monthly and then we update weekly, we've really been at 7.98 million max availability. However, that availability is reduced by the amount we owe on the term note. So we owe 2 million on the term note, so max availability is 8 million, less 2 million on the term note, gives us 6 million and our borrowings are ranging between 1 or 2 million now, and that's been greatly reduced, because we used the $2 million from those warrants that I spoke about to immediately pay down the line of credit. So we've got roughly 6 million of availability and our borrowings are going to average between 1 million and 2 million, going forward.

So, essentially, under normal conditions, you're going to have about an additional 4 million of available.

Three to 4 million of available, yes.

And with that you're anticipating that that takes care of your capital growth needs for both inventory and whatever else you want to do.

That is correct.

Yes, for the time being, I think.

Well, what would have to happen for you to, say, need additional capital growth then, sales growth beyond your imagination right now?

Well, I think for one thing, we're always on the lookout for is there an M&A opportunity that makes sense for the company? So, frankly, that's always in our minds is, is there the right opportunity for us there? So that could be one reason. And another reason would be that if we felt that it was time to invest in a major new initiative that would be let's say outside of the -- let's say the current momentum that we're in with our current businesses.

Okay, so you might use that for an additional R&D expenditure of some kind.

Yes, it could well be, or to enhance our business development capability. I would say those two would be the areas, and we're always looking at that. We're undergoing a strategic review right now and we do this on an annual basis. And when you see the right opportunity, then you really can't hesitate to go after it once you've done the right kind of an analysis.

And, frankly, the kind of actions that we've taken this year to bring us to I think a very substantial growth rate with some very solid profitability, the fact that we've cleaned up our balance sheet, puts us in a position to, let's say, exercise a lot more initiative in areas like that.

All right. Well, take us briefly back to, with the stronger balance sheet, you're able to finance additional sales. Has that been a hindrance with people being reluctant to qualify you?

You know, it honestly has not been.

All right. Okay, well, thank you very much.

Thank you, Frank.

Thanks, Frank.

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

Hi, Eric. How are you doing?

Good, good afternoon and nice to see continued progress and a constructive quarter. I have a question on the pricing of your products. As we look over the last year and a half or so, you may not have reached the tipping point where everybody has to have your product as of yet, but clearly there is proof in the marketplace of product acceptance and proof that the product actually creates a lot of value, including the value of human life. And can you talk a little bit about the pricing of your product? I mean, now that your product is more proven, shouldn't you be able to raise price with each new generation of product, particularly as your products become more feature rich?

I think it's a good question, and I would answer that in a generic sense, that we do look for those opportunities. To be honest with you, Eric, it's tough for us to discuss that particular subject on the call, not only for competitive reasons, but also just for customer reasons, but I don't dispute the opportunity that you cite.

Okay, and then in terms of the backlog on the traffic side of the business, is this initial uptick in he backlog of 20% just the beginning of what we should see from the government-sponsored work, or is this sort of kind of the growth rate in backlog that we ought to expect over the next few years?

I think we're actually going to end up doing better than that, but it's a little bit hard to say. For instance, Prop 1A and 1B in California, which are talking about very significant monies allocated to transportation, could affect that. And I think in general, all over the country, we're seeing an uptick as people realize that we've got to do something to fix this decaying infrastructure. I think we're going to do that or better.

Good, thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]

Please stand by for your next question. Your next question comes from the line of [Robert Hu] with [JM Cowen]. Please proceed.

Hi, Jack.

Hello, Robert, how are you?

Good, how are you?

Good.

Great quarter.

Thank you. Thank you very much.

I may have missed some of the comments, so if you can just see if you can provide some color on the inventory build. I notice that inventory is up quite a bit sequentially, so can you just talk about where are you guys actually adding inventory?

Sure, sure, Robert. This is Jim Miele. There's been several factors that have contributed to the overall growth in inventory. One main factor is that our Vantage product line is much broader. With the addition of products like to new color camera, new multi-channel processor, our E-Access products, so that's contributed to the growth in inventory, as well as Vantage has experienced back-to-back record sales quarters, so just the sales growth alone has forced us to carry extra inventory to meet demand.

AutoVue inventory has increased as we ramp up units in the North American aftermarket. We've got some inventory on hand, and as Jack spoke earlier, the decline in take-up by Mercedes has caused us to have some Mercedes LDW units on hand, but we'll be working those off over the next few quarters. They aren't obsolete at this point. They're just excess.

And, lastly, we're starting to experience longer lead times for electronic components, so that's forced us to maybe hold a little more inventory to make sure that we can meet future demand in both AutoVue and Vantage. That's complicated, but it's a complicated story.

I'm sure you're hearing that third factor in some of the other calls you guys are on. Lead times, in general, have been stretched out pretty good. And to protect ourselves and making sure we have enough inventory to meet shipments, that's one of the things that we're doing.

Okay, did you give us any breakdown for the product revenue between Roadway and Automotive?

Yes, we did. Product revenues for Roadway Sensors were 7 million for the quarter. The Automotive Sensors were 2.4 million and the consulting revenues were 5.1.

Thanks, good work.

And your next question is a follow-up question from the line of Frank Meglin from the Robbins Group. Please proceed.

Yes, going back to the inventory build and the lead times, how far out is that lead time and are you locked into what you have on hand is about what you can sell for the next quarter?

Well, I guess the longest lead time I'm aware of right now is 26 weeks. I'm not sure I understand the second part of your --

Well, if you're out 26 weeks and you haven't ordered enough of whatever it is you need and you have to wait 26 weeks to get it, you can't sell anymore than what you have on hand now or have already ordered.

Yes, but it's a continuing series of events, and so the 26-week lead time means that if we're doing our jobs we acted within that 26-week period so that we do have it and we have not missed shipment because of the unavailability of parts, but, honestly, we slighted it a couple of times, and that was one of the reasons that we were happy to see some new capital come into the company and it means that we have maybe a little more room to operate when you are dealing with long lead times.

And I'm assuming the 26 weeks is a critical part that you really can't go elsewhere?

Well, the parts are critical.

Yes, but you can get a Phillips head screw from somebody else -- so it's critical to what you have and, again, do you feel this impairs your top-line growth based on what you've given guidance for?

Well, I think that -- I'm not concerned about our top-line growth for that. I mean, look, this is the kind of thing that keeps our material and production people and sometimes me awake at night, just making sure that we're doing the right things there. And I think so far we've been pretty darn good at it, but it's something that you can never take for granted and we work it hard every day to make sure that we've got what we need and occasionally you've got to catch up with looking high and low for something that maybe you're in a little bit of jeopardy on, but so far we've managed to do a pretty good job at this.

All right, thank you very much.

Thank you, Frank.

Thanks, Frank.

This is all the time we have for questions today. I would now like to turn the call over to Mr. Jack Johnson for closing remarks. Please proceed sir.

Okay, well, I'd like to thank all of you for joining us on the call today. We had some very good attendance, and I think it's a reflection of the fact that we are, I think, executing on our game plan. We're growing nicely and we've got some nice profitability and we expect to keep doing what we're doing. Thanks very much.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect. Good day.