Iteris Inc (ITI) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to your Q3 2007 Iteris Earnings Conference Call. My name is Tony, and I'll be you coordinator for today. [OPERATOR INSTRUCTIONS]

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

Okay, great. Thank you operator, and welcome to the Iteris Third Quarter Conference Call. I'm Jim Miele, the Chief Financial Officer of Iteris. And I'm joined by Jack Johnson, the company's CEO. First, I'd like to recap the results of the fiscal 2007 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 this call, we may make forward-looking statements regarding future events and 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 to the documents that that company files from time to time with the SEC, specifically, the company's most recent Form 10-K and 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.

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 third quarter, Iteris reported net sales and contract revenues of $14.5 million, compared to $12.2 million in the same quarter of the prior-year period or an increase of 18.9%. The increase from the year-ago period was primarily a result of the 24.2% increase in Roadway Sensor revenues and a 20.5% increase in Transportation Systems Consulting revenues.

Roadway Sensor revenues were $6.5 million in the quarter compared to $5.2 million in the year-ago period while Transportation Systems Consulting revenues were $5.9 million for the quarter, up from the $4.9 million recorded in the year-ago period.

Automotive Sensor revenues were $2.1 million in the current quarter compared to $2 million recorded in the year-ago period. Jack will discuss our revenue performance in greater detail later in his comments.

Gross profits for all three of our business activities for the current quarter decreased to 39.2% of net sales and contract revenues from 40.9% in the year-ago period. The decrease in gross margins is mainly a result of a higher component of sub-contractor revenue in our Transportation System Consulting business, which typically results in a lower margin as well as the continuing effect of price discounts given to our largest Automotive Sensor customer.

Although sales of LDW units for the North American heavy truck market were up 71% for the quarter compared to the same period in the prior year and are up 130% for the nine-month period compared to the prior year, they have not yet increased to the point where they can offset this price discount.

Operating expenses for the third quarter increased by approximately 4.4% to $4.9 million from $4.7 million in the year-ago period but decreased as a percentage of sales to 34% from 38.7%. The increase in operating expenses was mainly a result of additional sales and marketing activities in both the Roadway and Automotive Sensor segments, partially offset by a decline in research development expenses.

We reported operating income of $751,000 for the current quarter compared to operating income of $263,000 in the third quarter of the previous fiscal year. Our operating income for the nine-month period ended December 31, 2006, was $2.6 million compared to a loss of $121,000 in the prior year. This marks the fourth consecutive quarter that the company has reported positive operating income, and we expect this trend to continue.

We reported net income for the third quarter of $310,000 or one penny per share compared to net income of $136,000 or break-even per share for the third quarter of the prior year. Net income for the nine-month period was $1.3 million or $0.04 per share compared to a loss of $745,000 or $0.03 per share in the prior year.

I would like to now turn my attention to the balance sheet. During the current quarter, the company entered into a new $8 million credit facility with Silicon Valley Bank replacing the existing $5 million facility with Wells Fargo as well as the Wells Fargo term note. This change has been extremely positive, and the new line provides us with the additional working capital needed to grow our businesses.

Additionally, inventory has increased from $2.8 million at March 31, 2006 to $6.4 million as of December 31, 2006. The increase in inventory is primarily related to the transition to new products in both our Sensor businesses and a build-up of lane departure warning units for the North American heavy truck market.

Additionally, we are maintaining higher levels of component inventories to offset the effects of longer lead times. I expect inventory levels to decline by March 31, 2007, as we complete the transition to our new products and sales of LDW units in North America continue to increase.

Now, I would 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 pleased to report another quarter of strong top line growth as well as significant growth in operating income. Our sales are up 19% over the year-ago quarter and nearly 16% year-to-date.

Our operating income is also up by nearly a factor of three over the year-ago quarter and $2.7 million over last year's small loss. We are performing at the high end of the financial guidance we gave at the start of the fiscal year.

Our market presence and profile have never been stronger as we continue to launch new products and increase our marketing efforts. We are in an attractive market space that is a key enabler for not only the U.S. economy, but the global economy as well. The safe and efficient of people and goods is an important prerequisite for economic success.

Now, after some years of under-investment, big investments are now being made at the Federal, state and local levels as the U.S. works to improve its transportation infrastructure. The 30% increase in Federal funding we have talked about in previous calls extends out to the year 2010, and many state and local governments are starting their own initiatives as well. Iteris is a recognized leader in this market, and we expect to continue reaping the benefits.

Currently, we believe that the infrastructure part of our business is in the early stages of a sustainable and very profitable run, which is evidenced by the growth we are experiencing this year in both Roadway Sensors and Transportation Systems. Roadway Sensor sales are up 24% over Q3 last year and 22% year-to-date, primarily driven by two factors.

One is the aforementioned influx of money we're seeing at many governmental levels. And another is the market acceptance of our new product offerings including our color camera and eAccess. The color camera introduced only two quarters ago, approached nearly 40% of our total camera shipments in the quarter and drives a better set of economics on each transaction than on the black-and-white version that it is displacing.

Sales of our eAccess product, which enables IP-addressable streaming video for enhanced connectivity has driven approximately $3 million of business for us this year, exceeding our expectations. Some of the most important decisions the company makes is how it spends its R&D dollars, and I'm really pleased with the investments that we have made and are continuing to make in new product development.

Our Transportation Systems business is also doing very well with year-to-date revenues of 14 -- up 14% and year-to-date operating income up nearly 35%. Now, these results are driven by the increase in transportation funding and also by the success we've had in bringing new hires on board to help execute on this business.

So far this year, we have increased our headcount by 16 professionals, which is well above our plan for the year, and we've signed nearly $20 million in new business, which exceeds our current run rate by over 22%. And this means we are building a solid backlog for next year, and we have a lot more new work in the pipeline.

In the automotive side of the business, truck sales were up 10% in the quarter, largely driven by a 71% increase in North American truck sales. We continue to gain traction in North America currently at 39 fleets, which have standardized on our system representing an opportunity of over 19,000 vehicles. In addition, we have 65 more fleets in test, which have over 134,000 vehicles.

So far, over 35% of the fleets that we have tested our system on have decided to standardize, and only one fleet has actually have turned us down. All of the others are still in play. Our goal is to convert the fleets that are in test to sales and to get more fleets into evaluation.

We are also continuing to make important progress on the OEM side of the truck business having just announced, this week, our first orders for our AutoVu lane departure warning system from a major Asian OEM.

This OEM indicated its intention to make our system standard on its heavy-duty, long-haul trucks with an estimated volume of approximately 5,000 units per year. Now, we expect to ship our first 400 units in the current quarter.

Now, in addition to the new Asian OEM, we are now available on Mercedes and [Mann], [Invico], [Scanya] and [Daf] in Europe, and Freightliner, Sterling, Volvo, International, Kenworth, Peterbilt and Mack in North America, either direct from the manufacturer or on an after-market basis. This also helps our fleet sales, because we're available on nearly all heavy truck models currently being built.

This has brought us to a strategic inflexion point in the truck business. The time of big investments to qualify on major truck brands is coming to an end during the current quarter. Going forward, our focus that AutoVu is to increase our investment in sales and marketing to capitalize on the dominant market position we've created and to drive revenue and profitability. In parallel, we will continue to support Valeo, our strategic partner in the car market.

In summary, we just finished another fine quarter with strong revenue and profit performance. We're well positioned in expanding markets and are making investments to accelerate top and bottom line growth even more. The end result should be enhanced shareholder values for our investors. This concludes my prepared remarks, and we'll now open for questions. Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Frank Magdlen with Robins Group. Please proceed.

Good afternoon.

Hey. Hi Frank, how are you?

Hello, Frank.

Very well. A couple of things, a couple of data points I missed and that is, the color camera you said was what percent of shipments?

40% of shipments this quarter. And that was -- remember, we just introduced this a couple of quarters ago. And it is displacing the black-and-whites, which has been our mainstay for many years at a very accelerated rate, which we like. Not only do the customers like the color that they see, when actually looking through the camera, it gives them better definition.

The issues that used to exist regarding low light level performance in color cameras are no longer in existence. So, we're really happy with it, and we like the economics that we also get on that camera.

What does the eAccess really do to the community that's installing your equipment?

Well, it's really all about connectivity. If you think about the way the whole world is going these days, everybody's moving to a higher level of integration to have all the information that you need in the same place and at the same time.

And so, for agencies that want to bring back video to a traffic operation center and have it available, either for viewing at that center or perhaps just available to the traffic engineer who is monitoring a particular part of the city's infrastructure, it allows them to view in real time, exactly what's going on in that intersection. And so, it's a quite a force multiplier for the city, and we're able to do that more and more efficiently as time goes on. We continue enhancing our products -- accessories in this area.

[OPERATOR INSTRUCTIONS] Your next question comes from [Brett Reef] with Janney Montgomery Scott. Please proceed.

Yes, good afternoon gentlemen.

Hello, Brett.

Hello, Brett.

You mentioned toward the end of your remarks that going forward with truck sales you've reached an inflexion point. And you're not going to have to spend as much on R&D, and more corporate resources can be allocated to sales and marketing. Could you amplify on that a little bit so I can understand it a little bit better?

Okay. Well Brett, I haven't seen you on previous call, so let me just catch you up a little bit. Over the past couple of years, we have been working hard to qualify our second generation of lane departure warning units for the truck market.

Right.

And we have just gone through a very long cycle of qualifying this next-generation product with the OEMs that exist out there. There's basically 12 major OEMs. We're the only qualified supplier.

Right.

And we are available, either direct from the OEM or as an after-market product on now 11 out of those 12. And that was a very lengthy project -- or excuse me, process, and very expensive to actually go through the qualification process on each and every one of these. And we're essentially, with this new Asian OEM that we announced, we're essentially complete with that whole series of processes.

So, that's what I meant by a strategic inflexion point. The era where we had a major investment, which we've really been going into for the last two years in getting qualified on these new truck suppliers is coming to an end, and so our focus is really going to be exploiting this terrific market position that we've created.

This, of course, doesn't imply that we're not doing R&D anymore. Obviously, we're working on the next features. And the basic sort of stuff you'd expect us to be doing in R&D continues, but I think that you will see a drop-off in the level of investment on the R&D side, relative to this major activity we've been undergoing.

Right. Now, what market share with trucks do you have in Europe? What do you have in the United States? And what are you shooting for in the United States?

Well first of all, the market share is still actually quite small as we speak today in terms of, let's say, the over -- the amount of new trucks that are produced every year. It's in the neighborhood of roughly 500,000 in North America and also in Europe. And we've got a little bit over 30,000 trucks out there right now with our feature in it. So, we're really at the infant stages of this market, and it's still pretty immature at this point.

But ultimately, we think that this is a much larger market opportunity than that, and at Mercedes for instance, they are at about 10% penetration on the trucks that they're selling. And we think it ultimately can be higher than that, but that's probably the best metric that we have.

But in parallel with selling to the OEMs, we are also selling to fleets in the U.S., and we believe that as we get major fleets that become convinced of the benefits of going to our system, which is really an ROI-based return for them that we'll start to see that accelerate much more here in the U.S.

Right. All right, thank you very much for taking my questions.

Sure.

With The Robins Group, your next question comes from Frank Magdlen. Please proceed.

Yes, hey --.

Hey, Frank.

Hi. I got cut off there, a couple of other questions. On interest expense going forward, since I'm not sure of the timing, what should we expect?

Well, the interest expense is a little up from where we were in the prior year. Although our new bank line provides us with a greater ability to borrow, the banking structure isn't as efficient. However, we have been paying down debt to the landlord. So generally going forward, I would expect it to be roughly the same. We have two more payments left on a note to the landlord.

That will free up some interest expense, and then the debenture interest makes up roughly $600,000 a year. So, until May of 2009 when those debentures come due, you should expect at least $600,000 a year and then going forward in the short term, roughly what we've been experiencing for the last few quarters.

All right. And then, I want to make sure the emphasis was that you thought your inventory levels would be down by the end of the quarter?

Yes. I think that we'll start to see those decline. One of the new products that I alluded to was the color camera. And currently, we've been sourcing the monochrome camera, the color camera, to try to get the right levels to meet demand. We've seen such a -- I guess, broad application of the color camera that the take-up rates are excellent. We can stop producing monochrome cameras, get the right mix.

So, that's one area of where we'll see the inventory start to go down. As we sell more LDW units into the North American truck market, we'll start to see that go down. So, I'm expecting it to go down, not dramatically. But over the next two quarters, you'll see it decrease.

Are you willing to tell us -- and the bulk of the inventory is what?

Well, it's almost equally -- the increases are almost split equally between Roadway Sensors. That increase was a little less than $2 million of inventory, and it's related to the cut-in of these new products, a color camera in addition to a new multi-channel processor as well as the eAccess product and just -- we're experiencing some long lead times, so we're making sure we have enough component inventory on hand.

The AutoVu inventory is up roughly $1.5 million, and a lot of that's related to a build-up of the North American LDW unit as well as carrying components because of long lead times as we go into production with European OEMs such as Scanya and Daf and this Asian OEM that we just recently qualified.

And then, what are the -- on the outside, what are the lead times?

Well gee, some of them can be up to as long as 22 weeks. That's probably the longest that I'm aware of, 22 weeks, 16-week lead times for some components.

All right. And then just the -- to make sure we understood the Mercedes, 10% of their new production is -- has the -- your product on it, line departure?

Yes. Roughly 10%, that's the information that they've given to us.

And is that primarily North America?

No, no. Actually, that's in Europe.

Okay, thank you very much.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from [Walter Ramsley] with [Walworth Partners]. Please proceed.

Congratulations, good quarter. I've got a couple of questions. The color camera, could you tell us what the principal applications are for that product?

Okay. Well, it's basically the mainstay of our typical application in an intersection where we have -- let's say, in a typical intersection where you would have four approaches, we would have a camera that overlooks each approach. And that camera is focused on the stop bar.

And we can make decisions about what the demand is in that intersection by understanding what is the -- whether there are vehicles at the stop bar or not and in some cases, how long the queue is. And so, that's the -- kind of the fundamental application that we use, and that's how the cameras are used.

Now, up to this point until a couple of quarters ago, we used a black-and-white camera for that. And as I noted, we introduced our color camera with very, very -- an excellent reception from our customer base.

So, it just means that it picks up the cars better or fewer mistakes, or what's the advantage?

Well, I think from a basic detection perspective, I don't think it actually has improved the basic detection all that much. But, for the customers who do want to bring video back to their traffic operation center, the fact that they're able to differentiate cars from each other and the colors and those kind of thing is a --.

Okay.

It's a feature that's attractive to them.

I see. And then yesterday in The Wall Street Journal, there was a editorial, I think, about the traffic cameras catching people going through red lights and doing U-turns in the middle of the night and sending them tickets. Are you guys involved in that business?

Actually, we are involved in that business, but not in the business of actually doing the red light enforcement itself. In many cases, our cameras are used as a trigger, which would indicate that a vehicle has just gone over the stop bar when there is a red light. But, our system does not actually take the pictures and send people tickets. That's actually a -- we're a supplier to another -- several other companies that do that.

So, is that channel expanding? Or, did The Wall Street Journal just kind of get carried away do you think?

No. It's certainly a growing area. And it's actually quite different from what we do.

Yes.

Because we're using intelligent video to basically recognize the presence of a vehicle in a certain region of interest, and in red light enforcement, they're trying to read the license plate of that vehicle and be able to identify the vehicle and the driver. Those applications are much more high resolution, much more expensive applications than us.

And there is a large back-room operation that supports all that where they're trying to do quality control on the tickets and whether they got a good reading on the license number and sending out tickets and stuff like that. So, it's actually a very different business.

Okay. And then just one last thing, you mentioned that the US spending on the highway market in general, I guess, is going up 30% through the year --?

2010.

10. Is that accumulative? Or, is that a 30% annual rate?

It actually represents the cumulative expenditure from the previous six-year bill.

Okay, I got it. All right, thanks again. I appreciate it.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Okay. Your next question comes from Jamie DeYoung with [Rivernan McMann]. Please proceed.

Actually, that was Gruber & McBaine Capital Management. We've been holders for a long time. Again, nice quarter.

Thanks, Jamie.

I got on the call just a little bit late. If you could talk a little bit about the trend in ASPs for the lane departure warning, that's my first question.

Okay. Well essentially, the trend in ASPs is actually up. Our initial contract that we had with Mercedes and Freightliner was on a -- was because of the significant investments they made right along with us in bringing this product to market. And later OEMs who've come on the market have seen higher prices than that. And fleets that purchase from us pay higher prices to the OEMs. And so, the general trend is upward.

Okay. Can you get a kind of ballpark idea of where you hope to exit the year on that?

Well, I honestly don't want to comment specifically in terms of some sort of an average sales price. We have [penalty] customers that listen in on these calls, but erstwhile competitors and frankly, I really don't want to go into that area.

Good enough answer for me.

Okay, thanks.

Second question, so the gross margins were down 170 basis points in the quarter, and the explanation was understandable. But going forward, what should we think of in terms of the kind of the gross margin level that you'd like to see?

Well generally, the company has been in the low 40s for its combined businesses, probably in the 41, 42% range. This particular quarter, we had quite a bit of sub-contractor content in our consulting business, but lower margin work.

And then additionally, the AutoVu margins have been impacted by the price reduction to our largest customer, which is Mercedes. So going forward, I don't expect the margin to be in the low 40% range. I think this 39% was a bit of a perfect storm with a couple of things happening all in the same quarter.

We're getting great margins on our Vantage Roadway Sensor products, and we're always looking at our organization and our overheads and fixed costs as well as smart R&D, developments that take cost out of our products. So I think going forward, you can generally expect the margins to be -- kind of continue in the low 40s with this quarter one that dipped down for the reasons stated.

Okay. And lastly, the units on an annual basis you think you're going to get with the Asian OEM you recently won, could you give me that number again please?

Okay. They have given us a estimate of 5,000 units in the first year.

Okay.

And so, we'll see that play out. If they do those kind of buy-ins, they will actually make them our largest customer, ahead of Mercedes, so we're very hopeful.

Terrific. Again, nice quarter. Thank you.

Okay, thank you.

Thanks.

Your next question comes from [Chris Bows] with CJB Capital. Please proceed.

Hi, guys. Congratulations, another great quarter, I just have a couple of questions. I've kind of bounced in and out of the call, but I wanted to know if you guys touched on backlog for the various divisions?

Not specifically, we can announce that when we get the Q out. But I can tell you just roughly, Systems backlog was a little north of $19 million. Vantage backlog was a little north of $2 million, and AutoVu was right around $1.8 million. So generally, the Systems backlog is up. It was about $15.3, $15.4 million at the end of our March year, and now it's $19.3 million.

So, that's just evidence that there is just growth in that segment. Backlog continues to grow. Vantage backlog is relatively the same. That's not a business where we have a lot of visibility in the long term, and then the AutoVu backlog is roughly where it's been the last few quarters.

Okay. Regarding AutoVu in the passenger car market, any updates there? Clearly the last few calls, you guys have been working on some things, nothing to fruition yet?

Yes. Well, we're continuing to work that market with Valeo. We've got an ongoing discussion with Nissan about some additional models. Right now, we're currently working with two OEMs who are expecting to be making procurement decisions sometime in the next six to twelve months. And we're working diligently with Valeo to win that business, and that's going to play out over the next several quarters.

Now, I know with the AutoVu in the luxury car market or the passenger car market, you're partnered with Valeo. Remind me, in the truck side it's Direct?

Yes.

And, same goes with Asia? It didn't matter about geography, it's U.S., Europe and Asia?

Right, exactly. Just -- another way to think about it might be, we're a free agent in the truck market and in the car market, which is Class 1 and Class 2 vehicles. Valeo is our partner worldwide.

Great. And guys, anything on guidance?

Well, we have --.

Q4 and looking out over the next -- looking out for your fiscal year 2008?

Actually, it's -- in the next call, we're going to be giving guidance for the next fiscal year. Just to recap, we said we were going to do 11 to 14% growth this year, and right now, we're actually over that guidance with one quarter left to go. So, we're having, I think, a very good year from both a growth and a profitability perspective.

Next year, we expect to see those -- our guidance will increase once again, because we're taking steps to accelerate the growth of the company. We've got -- we're in a couple of expanding markets, and we've got some significant opportunity where we believe that we can make some significant investment to accelerate top line growth and improve operating income at the same time. And we'll be talking more about that next quarter. We're pretty excited about it.

Great. Well again, congratulations, you guys have done a great job.

Thank you, very much.

Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] And we now have a follow-up question from the line of Walter Ramsley from Walworth Partners. Please proceed.

Thanks, just going back to the color camera again, do the competition have color cameras or, is that a unique offering to Iteris?

The -- one of our competitors actually does, and we expect others will follow soon.

And the pricing in the industry, has that been pretty sturdy? Or, is there beginning to be more price competition? Or, what's the outlook there?

Well, there's always been price competition within the industry. And if you look back over the years, we have seen some erosion. What we've been able to do is, we've been able to reduce our costs kind of ahead of price erosion, and we've been able to keep our margins actually really solid for the past several years. There's been a lot of consistency to it, and we are on the same path right now.

And then in the Roadway sector, that all by itself, do you think the company is gaining market share or holding its own? Or, are the other companies gaining market share on you guys?

Well I think right now, it's a combination of a couple of things. Number one, I think the overall market is expanding. And of course, that's great for everybody. But, I think our growth rate is actually better than our competitors right now.

Sounds good, thanks very much.

Okay.

Okay. There are no questions in queue. I'd now like to turn it back to Jack for closing remarks.

Okay, thanks a lot everybody. Loved having you on the call, we'll be looking forward to seeing you next quarter. Thank you.

Ladies and gentlemen, thank you for your attendance on today's call. This concludes your call. Please enjoy your day.