Iteris Inc (ITI) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Iteris Inc. 2007 Fourth Quarter Earnings Conference Call. My name is Latisha, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

At this time, I will turn the presentation over to Jim Miele, Chief Financial Officer. Please proceed sir.

Thank you, operator, and welcome to the Iteris fourth quarter 2007 conference call. I am Jim Miele, the Chief Financial Officer of Iteris, and I am joined today by Abbas Mohaddes, the Company's CEO.

First, I would like to recap the results for the fiscal 2007 fourth quarter and our year ended March 31, 2007, and then Abbas will provide further commentary about our business. At the conclusion of Abbas' 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 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 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 vision-based technologies and intelligent transportation systems that optimize traffic flow and enhance driver safety. Our offerings leverage proprietary object recognition software and transportation engineering expertise to provide innovative solutions for the intelligent transportation systems market.

For the fourth quarter ended March 31, 2007, Iteris reported net sales and contract revenues of $15.5 million, compared to $13.5 million in the same quarter of the prior-year or an increase of 14.9%. Gross profit for the fourth quarter increased to 42.9% from 41.6% in the year-ago period while operating expenses in the quarter increased by approximately 11.9% to $5.5 million from $4.9 million in the year ago period, but decreased as a percentage of net sales and contract revenues to 35.1% from 36.1%. Abbas will discuss the financial performance of our three segments in greater detail later in his comments.

The Company reported operating income of $1.2 million for the current quarter compared to operating income of $740,000 in the fourth quarter of the previous fiscal year. This marks the sixth consecutive quarter that the Company has reported positive operating income. We expect this trend to continue.

Net income for the fourth quarter was $1.6 million or $0.05 per share compared to net income of $825,000 or $0.03 per share for the fourth quarter of the prior year. Included in net income for the current quarter was a positive income tax benefit of $798,000 resulting from the recognition of additional deferred tax assets.

Year-to-date net sales and contract revenues were $58.3 million compared to $50.5 million in the prior year or an increase of 15.5%. Operating income for our year ended March 31, 2007 was $3.8 million or 6.6% of total net sales and contract revenues compared to operating income of $619,000 in the prior year, while net income for the year was $2.9 million or $0.09 per fully diluted share compared to net income of $80,000 or $0.00 per share last year.

From a balance sheet perspective, our current ratio has expanded to over 1.5 to 1 compared to 1.2 to 1 at the end of '06. Total inventory decreased by only 51,000 from last quarter and is still 3.6 million greater than at the end of the prior year. As I indicated on the last call, I expect inventory levels to decline as we move into fiscal 2008. At March 31, 2007, we had $4 million borrowed against our $8 million line of credit with $2.4 million available. Availability is reduced by both borrowings in the line of credit and our term note with Silicon Valley Bank, we owed $1.6 million on the term note at year end.

Now, I would like to turn the call back over to Abbas who will discuss the quarter and our strategy in greater detail. Abbas?

Thanks, Jim.

I am pleased with the results of our fourth quarter supported by the growth at each of our business segments. Our quarterly operating income of $1.2 million or the notable 62% increase over a year ago and our gross margin also improved 130 basis points over same period last year. Our revenue growth for the fiscal year was 15.5%, exceeding the guideline we provided last year. We also achieved an operating income of $3.8 million for the year, which is a significant improvement over the prior year. The growth we are experiencing is enabled by and large, through funds we have been allocated by federal, state and local agencies for more efficient transportation infrastructure. In addition to the significant expansion of the Highway Bill, several states are adding transportation [measures and] bonds such as $20 billion infrastructure bond passed in California last November.

In large metropolitan areas of the U.S., traffic congestion is on the forefront of political platforms, leading to further investments both by public and private entities in traffic management and congestion mitigation measures, which is our core business. We are capitalizing on the available funds and awareness by increasing our marketing, business development effort and by the rapid introduction of new products into the marketplace. We are also experiencing an accelerated rate of adoption in our automotive sensors technology, particularly in the North American truck aftermarket. Recent studies and testimonials suggest reduction in fleet accidents by as much as 90%. In addition, the media and the U.S. National Highway Traffic Safety Administration are increasing their support for key safety features, including Lane Departure Warning.

Overall, our Roadway Sensors segment enjoyed an excellent quarter and finished the year with over 21% growth, reaching revenue in excess of $27 million. Increased market adoption, favorable reaction to cheap product offerings during the year and excellent support from our dealer network are key contributors to this growth. In addition, our direct approach to market in California has been a success and it provides additional support for future growth. We continue to be pleased with the stable gross margin in this business, which came 50 basis points year-over-year due to our ability to expand our high value product offerings while lowering our component and production costs.

This fiscal year is anticipated to be a strong one for Roadway Sensors, due to accelerated adoption of video detection and our plan to introduce several new products to market. Keep in mind that only 12% of the applicable intersections are currently using video detection. We believe that the adoption of video detection will continue to accelerate this year.

Our transportation systems segment had a solid quarter and finished the year with 14% increase in sales and a backlog in excess of $20 million, which is 20% -- which is rather 27% increase year-over-year. This level of backlog positions us nicely for continued growth in our current fiscal year which began on April 1, 2007. Another encouraging indicator was the booking of over $26 million in new signed contracts for the year, which was 18% over the fiscal year 2007 sales.

As we enter the new fiscal year, there is every reason to be optimistic about the prospects of this segment of the business. We are currently bidding on over $20 million of new projects and are in negotiation for over $10 million of [awarded] contracts. We have already added five associates thus far this year and anticipate reaching as many as 20 additional associates by the end of this year.

Our Automotive Sensors segment also made good progress during the quarter with an 18.7% revenue increase over the prior quarter, reaching $2.4 million. Additionally, we have been able to reduce our level of R&D investment in this area now that we have completed some major developments. We finished the year with lower than expected 3% increase in revenue year-over-year. This is largely attributed to a slower than expected purchase orders in European heavy trucks during the first three quarters of the year. However, we have made good progress in North American aftermarket truck sales and the number of fleets that have adopted our system now stands at 44, representing over 24,000 heavy trucks. Currently, 69 fleets with a combined total of over 146,000 trucks are testing our technology. In addition, we began penetrating into the Japan market and have already started production shipments to Fuso during quarter four. We continue to pursue OEMs in current truck as well as truck aftermarket opportunities.

With starting first fiscal quarter of this year, we will begin enjoying profitability in this business segment. I would like to take this opportunity to provide guidance for the fiscal year which started on April 1. We expect our overall revenues to grow 15% to 18% this year with all three segments of our business contributing to this growth. We are experiencing a significant momentum in our infrastructure business segments and also anticipate our automotive segments to be as strong, particularly in the truck aftermarket as we have seen the rate of fleet adoption accelerating, as well as further penetration in the Japan truck market. We expect to maintain gross margin at level comparable to the year just ended and we expect operating expenses to decline slightly as a percent of sales as we get more leverage in the business model.

I have undertaken a strategic review of Iteris, identifying the strategies and initiatives for accelerated and sustainable growth. This is mostly complete and will be presented to our Board of Directors at our July meeting, then presented to investors during our second quarter conference call.

In summary, I believe our business segments have excellent macro drivers that we as a Company can continue to exploit as we begin implementing the strategies and initiatives that will provide sustainable incremental upside to the revenue and operating income growth we have achieved to date.

I would like to take this opportunity to thank our investors, business partners, dedicated management team, and our associates as we embark on a great year at Iteris. This concludes my remarks. We will be delighted to respond to questions and comments at this point.

(OPERATOR INSTRUCTIONS)

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

Good afternoon and congratulations on the quarter.

Wanted to ask you guys, maybe you can talk a little bit more about AutoVue in the truck market and what you are seeing develop with the fleet business which seems to be very strong, and then maybe what we should expect in the fleet part of the business, and really any other part of the AutoVue truck business going forward?

Thank you.

We have been quite fortunate that we have been qualified for 11 out of 12 top OEMs at this point. We have been, as I indicated in my remarks, began production, offering our technology to Fuso, which happens to be one of the top four truck manufacturers in Japan and we are quite happy about that. I would anticipate further penetration into Japan market as well as the North American aftermarket in trucks. We have now essentially qualified for nearly 70 fleets, these are larger fleets over 300 trucks each, and I feel optimistic in this fiscal year that good growth would come from that particular market for us.

And then, this new OEM that you picked up in Japan, is that -- when does that start, when do you start shipping to them?

We actually have gone into production, started in the Q4. So, this quarter we continue providing essentially our technology. I might add that Fuso, which is by the way, a Mitsubishi-Daimler owned company, have identified our technology as a standard. So, that's already happening and we would continue in the coming quarters to continue providing shipment to them.

Okay, and then, separately, can you update us on progress in the passenger car market for AutoVue?

Absolutely. As you know, passenger car, it really takes a while to expand on this, we have excellent relationship with Valeo. I have been in discussion with them as recent as yesterday. They are working very hard pursuing other OEMs. They have a specific strategy, bundling the strategies of technology, and just with Nissan itself, Nissan manufactures 3 million cars a year. We have only been in 44,000 of these vehicles. So, we anticipate a continuation on that, although it is difficult to really quantify and put a specific timeframe as to when that particular market would accelerate to our satisfaction.

Have there been other companies winning contracts or is it similar to how the situation was previously where it seems like you guys have a foothold there and didn't seem like anyone else was really winning contracts with the major OEMs?

Excellent question. What we have seen is, again this is sort of a two-edge sword, if you will. We have seen other competitors coming to market which validates of course, this particular technology we are excited about. However, they have -- we have seen some announcements. As an example, we have seen an announcement from an Israeli company called MobilEye working with BMW. We have seen one or two other announcements. As we speak, we are not aware of any other competitors that actually have the working vehicle to market. There has been comments about later this year in fall and future. So, we haven't really seen that at this point. But, we are aware that the competition is penetrating into the car market.

Okay. And then also, and I'll let somebody else jump in after this question, but outside of seasonality, do you guys expect the Roadway Sensor part of your business to grow at a similar rate to what we saw in Q4 for the foreseeable future or how should we expect that business to play out in the near term?

Yes, I wouldn't be able to comment on a quarterly basis, but we do believe that the growth in that particular market is going to continue. We have seen really an accelerated adoption in the video market and we also envision to further penetrate in the international market as well. We are planning to introduce several new products into the market before this fiscal year is over.

Okay, good to hear. Thanks very much and good luck.

Thank you.

[Thank you, Jeff].

And from the line of The Robins Group, with the next question, we have Frank Magdlen, please proceed.

Good afternoon and congratulations on a nice quarter, nice year.

Thank you, Frank.

Thank you, Mr. Magdlen.

Could you address some of the seasonality that we might expect as maybe you ramp some of your new product that might come out?

Seasonality, what we have seen in the past, Frank, is that the consulting market continues at a reasonable consistent pace, if you will. What we have seen is, in the Roadway Sensors is that, when it gets closer to winter -- late fall, winter, we get less POs, particularly from the northern states in U.S., then they just don't do as much construction. But, in our plan, we have already taken that into account as we have in the past. As far as the product offerings, very soon, we would have an announcement on a particular new product that we are offering. We are also, as it has been our tradition, investing wisely in the required kind of R&D, we like to capitalize on the health of the infrastructure market and accelerate the product to market. So, I would envision several new products coming to market before this fiscal year is over.

All right. Could you elaborate a little bit on the sales cycle in Roadway Sensor and the fact that there is a much higher percentage of the intersections that are reworked or reengineered go video?

Yes, excellent question. What we have seen and we envision that this trend to continue and possibly accelerate is the refurbished intersections. We get about 13,000 to 14,000 of these refurbished ones that essentially 50% of those go to video, and of course we get -- and this is in U.S. alone. And of course, we get our good share of that market, 25% to 30% of that market, and that's a wonderful added opportunity for us. In addition to the penetration, as I indicated, only 12% of the penetration rate is already in the video detection adoption out of the 325,000 traffic signals that we have. So, yes, we would enjoy essentially some revenues out of this refurbished component of the market.

But, going back to the question is -- why is there such a high percentage that go video on the refurbishment?

Oh, excellent. Well, you know, what happens is that this whole adoption of video technology, when you are at a point that you are looking at the large cycle of essentially video versus inductive loops, you look at refurbishing, essentially you have to cut the asphalt, put the wire, cover it, [comb] the intersection, it requires maintenance, you look at the numbers and your funds. And so, compare the legacy technology with the good new lifecycle of our technology, 98% accuracy versus -- in metropolitans, 20% to 40% of these legacy loops really malfunction, they don't work. And so, if you are a traffic engineer, you are leaning more towards a better technology, better lifecycle and essentially, more cost effective. So, that rate is accelerating, it is easier to do it than you are doing the refurbish.

All right. Thank you very much.

Thank you for the question.

(OPERATOR INSTRUCTIONS)

And representing Gruber & McBaine, the next question comes from Eric Swergold. Please proceed.

Good afternoon and congratulations on your progress.

Thank you.

Could you talk about your work in the insurance industry with respect to adoption in the truck market? It would seem that your data has come a long way since the product began its installation process at trucking companies, and it would seem that there might be enough data now to make a case for insurance companies offering some form of a rebate or a price break to their customers who adopt lane departure. Could you talk about your relationships in the insurance industry and what your strategy is there? Thank you.

Absolutely, and thank you very much for this excellent question. We are quite excited about the studies and testimonials that are coming forward suggesting significant reduction in accidents because of installation of our technology, the lane departure warning, we have been quite pleased by some of the insurance companies reacting to this. Particular one, a leading insurance company that we have been working with, they are actually looking at four specific safety features that lane departure would be one of them, and they are envisioning that offering essentially a discount to the fleet, if they choose to pick two of those four safety features. That work is really in progress, and I wouldn't anticipate that, when that happens, we would really see a significant take-up on that. Because what happens is that the larger fleets essentially are self-insured, so they look at the bottom line, what does this technology could help them? Many of them are convinced that they will -- reduction in accidents, that's just money at the bottom line. They are smaller fleets, the 100, 200 or less. Many of these fleets essentially go to insurance. So, insurance companies setting up and giving them a discount, we believe that that easily pays for itself. So, we are quite optimistic about that prospect and feel good about it going forward. And thank you very much, Mr. Swergold, asking that question.

Thank you.

And your next question comes as a follow-up from the line of Jeff Van Sinderen with B. Riley & Company. Please proceed.

You guys mentioned new product introductions and maybe you can give us a sense in terms of where you are? I know some of the R&D expense for some of the things you have been working on is now behind us, but maybe you could just give us a sense of what we should expect in terms of R&D expenditures for new products going forward?

Yes, thank you for the question. In the automotive sensor segment, the heavy lifting is complete. We have now done quite a bit of the R&D, although we continue essentially putting research and development in key areas. Much of the R&D this year is going to be attributed to new products in the Roadway Sensors, in the infrastructure where we see accelerated growth and really a good opportunity. We have prioritized the products that we are introducing to market. I envision that three to five major products to be introduced to market within the next nine months, I would envision one of them actually fairly soon within days. We would make an announcement. These are the kind of products that really help us sustain our leadership in the market. We believe that by accelerating a product to market not only we would achieve the sustainability of our leadership, but also we have an opportunity to possibly expand on the gross margin. Another comment that I should make is that a particular product that we would be introducing would fit in an underserved market. I could not elaborate on that at the moment for competitive purposes, but it has helped essentially penetrating both in a new geographic and also the particular offering in a market that we have not been serving so far. I hope that helps.

So, the last one you just mentioned, it sounds like that's more of a revolutionary product and then the others perhaps are more evolutionary, would that be the case?

Well, I believe you could say that. One in particular is a revolutionary in our point, because it does just -- is exceptionally suited for a particular market that we are envisioning.

Okay. And then, also wanted to ask you, Abbas, since you have been there as CEO for a few months, are you finding other areas of opportunity that maybe you hadn't seen before that now you want to focus on, that could maybe drive additional areas of growth for the Company and additional areas of profitability, and if so, what are those?

So, I have started again looking at opportunities like you mentioned. I plan to concluding my analysis and presenting essentially to the Board of Directors in July. And I really could not elaborate on those, but I could tell you that I really took the helm at a wonderful time. My predecessor worked hard to get us to this platform and I am excited to use this platform to really take it to the next level and identifying opportunities to continue our growth, sustain it, and perhaps accelerate it, and that's really all I can discuss at this point. Thanks for the question.

Okay, fair enough. Thanks very much.

And your next question comes as a follow-up from the line of Frank Magdlen with The Robins Group. Please proceed.

Hi, this is a follow-up to the new products, are they products that replace for the most part your existing product line, or are they add-ons or not a next generation but totally new product category?

Mr. Magdlen, I am afraid I wouldn't be able to expand on this that much, but I would say this. As you go forward in the technology that we are in, you always have to do a variety of things. One of them could be perhaps upgrading the platform. One of them could be really drastically new products that could help us both in accelerated growth and margin expansion. And we are looking at all of those areas, as we need to, and I am quite excited about it and I invite you to keep your eyes open for our releases and activities as we go forward.

All right. Thank you.

We have every intention of staying close to our investor community and informing them as soon as we are prepared to do so.

All right. Thank you.

You're welcome.

Ladies and gentlemen, this now concludes the question-and-answer session. At this time, I would turn the call over to Mr. Mohaddes for closing remarks.

Latisha, thank you very much. I just wanted to mention again, we appreciate everyone's support and look forward to updating the investment community on our continued progress. Thank you very much.

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect and have a good day.