Iteris Inc (ITI) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to your first quarter 2008 Iteris Incorporated Earnings Conference Call. My name is Katina, and I will be you 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.

Thank you, Katina, and welcome to the Iteris first quarter 2008 conference call. I'm Jim Miele, the Chief Financial Officer of Iteris, and I'm joined by Abbas Mohaddes, the Company's CEO.

First, I would like to recap the results of the fiscal 2008 first quarter. 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 would like to remind all 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 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.

For the first quarter ended June 2007, Iteris reported net sales and contract revenue of $15.8 million compared to $13.8 million in the same quarter of the prior year, or an increase of 14%. Net sales in contract revenues were up in all three of our segments.

Our Roadway Sensor segment grew 10.9% to $7.2 million compared to $6.5 million in the prior year period, mainly as a result of the continued adoption of our Vantage video detection products and expanded sales and marketing efforts throughout North America.

Our Transportation Systems Consulting segment grew 5.7% to $5.5 million from $5.2 million compared to the prior year period, while our Automotive Sensor segment greatly contributed to our net sales and contract revenue growth for the quarter and posting net sales growth of 44.9% to $3.0 million compared to $2.1 million in the prior year period.

This is the result of a 93.1% increase in lane departure warning unit sales from Q1 of the prior year, fuelled by expanding sales of our European OEMs, our new Japanese OEM, FUSO, and the North American heavy truck market.

Gross profits for the first quarter increased to 45% from 41.4% in the year ago period, while operating expenses in the quarter increased by approximately 11% to $5.1 million from $5 million reported in the year ago period, a decrease as a percentage of net sales in contract revenues to 35% from 36%.

The increase in gross profits is primarily a result of an increase in gross profits in both Roadway and Automotive Sensor. In Roadway Sensors, this was mainly due to production efficiencies and the shift of engineering resources for manufacturing and support products to R&D activities.

Additionally, Roadway Sensors margins are positively affected by our sales mix in terms of both geography and product mix. The increase in Automotive Sensors margin was primarily a result of higher sales volumes, which covered a greater amount of our fixed manufacturing overhead costs.

Furthermore, our customer base has expanded and overall unit volumes have increased, which has reduced the gross margin impact of contractual pricing to our largest European customer.

I feel good about our margin performance for the quarter, however I would like to reiterate that we still expect margins to be in line or slightly better than the FY 2008 margin guidance we provided on our last call.

The Company reported operating income of $1.6 million for the current quarter compared to operating income of $745,000 in the first quarter of the previous fiscal year. This is an increase of 111.3% from the prior year period. Net income for first quarter was $1.1 million or $0.03 per share compare to net income of $279,000 or $0.01 per share for the first quarter of the prior year.

From a balance sheet perspective, our current assets continue to expand and our current ratio remained solid at 1.5 to 1. Total inventory decreased by approximately 500,000 from last quarter, mainly as a result of decreases in both Roadway Sensors and Automotive Sensors inventory. We continue to focus on inventory reduction opportunities to the extent possible.

At March 31, 2007 -- or excuse me, at June 30, 2007, we had $4.4 million borrowed against our $8 million line of credit, with $2.4 million available. Availability was of course reduced by both borrowings in the line of credit and our term note with Silicon Valley Bank. We owed $1.3 million on the term note at June 30, and expect we will repay it in full by May 2008.

On another note, we made our final payment to our current landlord on a $1.2 million notes payable inherited from our 2004 merger with our former parent. Because of our growth in operating profits over the last seven quarters, we have been able to pay off this note and make timely payments on our bank term note.

As we continue to grow and make solid profits, we expect the term note to be paid off so that funds can be directed toward reducing our line of credit, thereby strengthening the Company's overall financial position.

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

Abbas?

Thanks, Jim. First of all, I am pleased with the results of our first quarter. We have growth in each of our revenue streams. I am particularly pleased with our continued -- the strong earnings momentum and impressive gross margin expansion.

Equally I am delighted to announce that for the first time in Iteris' history our Automotive Sensor business has now crossed into profitability.

Our success in this quarter was made possible in each revenue stream for various reasons. Roadway Sensors, which supplies video detection systems to state and local jurisdictions enjoyed a good quarter; expanded the gross margin by 500 basis points due to production efficiency and product mix.

We believe the adoption of video detection will be continue to be strong through the remainder of the year and beyond, and Iteris should be a primary beneficiary of this trend. We are strengthening our workforce in Roadway Sensors by adding key executives in business development and sales areas.

Transportation Systems, which provides a specialized consulting services, and this is primarily the same client base as our roadway system -- Roadway Sensors business also had a solid quarter.

We signed $6.7 million of new contracts. Our total backlog grew to $20.8 million, which is 25% increase year-over-year.

Backlog is one if not the key metric for measuring the performance of the business like transportation systems, and the 25% uplift positions us nicely for continued growth in our current fiscal year and beyond.

I am also happy to say that we are achieving our internal hiring plans for new consultants that will allow us to meet the demand created by our expanding backlog.

As mentioned before, our Automotive Sensors also performed very well, with a 45% revenue increase year over year, and 23% increase over just the last quarter. As I indicated earlier, Automotive Sensors achieved profitability this quarter. We shipped the first 1000 units to Mitsubishi FUSO Truck and Bus Corporation, a new Japanese headquarters OEM customer.

In terms of our aftermarket presence, we currently have 73 fleets, with combined total of over 149,000 trucks testing our technology, and 45 U.S. fleets, our current customers with 25,000 trucks.

All in all, I am proud to say that each business has continued to perform well and we are pursuing various opportunities for growth with great urgency. We are seeing an increase in the volume of request for proposals and bids in our core market. We continue to pursue the increasingly available funds from federal and state, local jurisdictions, as well as private sector that are being applied to mitigate traffic congestion.

To that end, we will increase our marketing and accelerate bringing innovative new products into the marketplace.

One example of this is our industry's first four channel rack mounted video detection processes introduced at the ITS America's Annual Meeting, which has been well received. This product will substantially add to the presence of our Roadway Sensors business, and we expect significant revenue and margin contribution going forward.

In the Automotive Sensors, we see an increase in sales of our lane departure warning technology with commercial truck fleets. The market pool for active safety feature such as lane departure warning is being driven by growing acceptance and advocacy of these features by the press and, more importantly, government organizations including the Federal Motor Carrier Safety Administration and National Highway Traffic Safety Administration.

We are also actively working with the insurance companies to help them understand the economic benefits in terms of lower claims from the installation of our technology, which may translate into reduced insurance premiums and therefore more demand.

As indicated in the last call, I want to take a strategic review of Iteris with a goal of identifying the strategies and initiatives for accelerated and sustainable growth, and ultimately increased shareholders' value.

As I indicated at our last earnings call that I would brief the investment community during the earnings call for our second quarter results, I would like to take this opportunity to provide some initial comments on our strategic opportunities, which will be expanded upon during our next call.

Please note that I will refrain from any detailed discussions for competitive reasons.

First, it is very clear that our core market is traffic and in particular congestion management, which is one of the key issues on today's political and social agenda from New York to Los Angeles and all the metropolitan areas in between as frequently reported in the media. The spending in congestion management is increasing and because of the blend of our product and services Iteris offers, we are uniquely positioned to capitalize on this opportunity and accelerate our growth.

Second, we intend to address the needs of this market with the application of advanced technologies that reduce congestion and improve safety and their quality, while providing our clients with a high rate of return and investment and tangible visible benefits.

I said traffic and congestion management is now is starting to receive massive political and financial support, particularly in the 75 largest metropolitan areas in the U.S. for Federal Highway Administration funding allocations. See the recent discussion New York City's congestion pricing scheme.

I want Iteris to become a provider of end-to-end solutions to this market, thanks to its broad base and integrated offering and its strong starting position in the market. The time is right to consolidate our various efforts and accelerate growth in that single direction.

Third, our short-term growth will be organically focused and operational excellence, innovation, and more urgency than we have exhibited in the past. Similar to combining our engineering groups during the first quarter, I believe other integration opportunities exist to deliver maximum level of profitability on incremental revenue growth.

We plan to expand our sales and marketing efforts in key market areas, penetrate new geographic areas, including expansion of our existing offices to cover additional territories as well as establishing presence in new geographic areas. We will develop new niche markets and deliver new innovative products and services to market in an accelerated fashion. To this end, we plan to introduce several key products and services to market within the next four quarters enhancing our growth strategy.

Fourth, we are currently considering strategic alliances and partnerships of various forms. Our objectives in this regard are to add key IP expert staff and client relationships that help us further and faster penetrate the traffic and congestion management market. We will share more of this with you as we go.

Finally, I want to be clear, the purpose of this strategic review which I started when I -- when assuming the CEO role in March is to create shareholder value. As you will know, Iteris has suffered from a stock that has not reflected our operational improvements made in the business over the last two years, the success of which in my view has been evident in our results throughout our fiscal year 2007, as well as the quarter on which I'm reporting today.

Therefore, my intention is to focus Iteris as a business and do all I can to increase growth and profitability for the short, mid and long-run. I think my interests in this exercise are fully aligned with all outside shareholders, as I am a significant shareholder myself.

In summary, I am pleased with the financial results of the first quarter. We have achieved key operational goals in terms of new product releases, bringing broad -- more expert staff in our Transportation Systems business to drive long-term revenue. And we have also done savings by combining separate product engineering organizations.

I believe we have lots of opportunities to further growth and profit ahead and are implementing a number of strategies that should accelerate our attaining that goal.

This concludes my remarks. We will be delighted to hear and respond to questions and comments that you might have. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

The first question will come from the line of Jeff Van Sinderen representing B. Riley.

Please proceed.

Hello, can you guys hear me?

Yes. Hi, Jeff.

Some background noise there. In any event, I wanted to congratulate you on the quarter.

Well, thank you, Jeff.

And then, I guess one question I had in terms of the gross margins, can you remind us what you guided to, I can't remember if you gave specific guidance for gross margins for the year?

And then also, given that your gross margin hit 45%, some of that due seemingly to efficiencies, but you did not change guidance. So, I was wondering are there changes in the mix that would preclude you from staying at that level.

Go ahead, Jim.

Yes, Jeff, let me take that question. I mean, first of all, I was very pleased with the results of the quarter especially the gross margin. There are a variety of factors that caused the margins to get to the 45% level.

When we talk about production efficiencies, what we mean is we are leveraging more volume through our warehouse, outsourcing more of the production, continuing to reduce cost of goods sold on products we sell. So, that will -- those activities of course will continue.

In terms of mix, at least from the Roadway Sensors, Vantage standpoint, a lot of it has to do with the geography of where we sell product, and we get better pricing in certain areas. So depending on the mix we sell and the mix of products where we get higher margins really impacted the margin. This particular quarter was excellent in terms of mix.

On an Automotive Sensors standpoint, for the AutoVue product, last year the contractual pricing that took effect with our largest European OEM, Mercedes, it really had an impact on our margins. And this year, they have increased their volumes. We are selling in Asia to FUSO; North America continues to increase. We've made some, let's just say, process efficiencies in our manufacturing department in that area, enabling us to essentially increase the margins in Automotive Sensors as well.

Additionally, this particular quarter for our Consulting business, we had a heavier content of work that we do in the house, which also provides a little bit higher of margin. So the guidance we gave at the end of '08 was that we expected margins to increase slightly, be a little better than our fiscal '07 margins, which [were around] 41.2%.

I am not ready to come off of the guidance yet, it's one quarter, but I would expect that we will do better than we did in the prior year, although I'm hesitant to go out to the market with a 45% number for the remainder of the year.

Okay, that's fair.

And then let me ask you, as far as the truck OEM business, where do you stand on adding new OEMs there and how should we expect that business to progress?

Yes, by the way, Jim and I are at different places on the call; we both have dialed in. As far as the truck OEMs, I indicated that we have expanded the number of fleets that are testing our technology, now up to 73 fleets, which adds up -- these fleets own up 149,000 trucks.

If that is any evidence, the majority of those that have tested our technology have adopted and become a customer. Right now, we have in U.S., as an example, 45 fleets. So we envision that much of those fleets testing would be adopting and become new customers.

Okay. And is it -- let me ask you, given that you got so much mileage and statistical data on hand at this point for AutoVue, do you -- is it getting easier to convert those truck fleet tests into wins?

We certainly have seen that trend, and of course each fleet is a little bit different because of the way they plan on spending their funds in safety. In many cases, it is a matter of timing. We certainly see a lot more adoption. There is more data now fortunately.

This last six months or so, [they] have been quite fortunate to get a good press. We see government organizations now really supporting. We recently had couple of coverage in various major newspapers.

So, yes, I do feel that it is a lot easier. When you go in and talk to some of these folks, it is not that, "Well, gee interesting," "Oh, yes, we have heard of it," and they have talked to their colleagues. And it seems like they are more familiar with it, which is nice for us.

Okay, good.

And then, can you also update us on the -- the passenger car market for AutoVue, the OEMs there, of any new OEM agreements been won by competitors or are there any -- any potential agreements that could be decided in the near future that Iteris could win?

Well, let me address it in a couple of different angles. First of all, it is sort of a double-edged sword but in a way, it is nice to see some competitors coming to market, but it validates that market. We have seen couple of announcements. Although, as we speak, I am not aware of any -- any working lane departure warning being sold in the passenger car, but we have perhaps seeing couple of announcements -- as an example, BMW has done that.

We are in constant contact with Valeo. You want to mention that just to strengthen their commitment to safety technologies, they have recently purchased another European company, CEL, just this last week that strengthens their ability to offer active safety features, and it helps us indirectly.

They are in discussion with several OEMs. I am aware of some that are actually testing it. We are not, at this point aware of any specific dates that a new OEM would be coming on board, but we are certainly in discussion with some, and that is promising. We have recently also seen request for proposal coming out from one of the Big Three in Detroit for a specific brand that Valeo would be proposing. So it all seems positive.

Okay, good. And then I guess the other question I had in terms Vantage, are the new generation products that you guys have introduced helping you displace competitors in that marketplace?

Well, it certainly puts us in a good competitive advantage. I wouldn't necessarily go as far as displacing them. But this is a market that we have chosen to accelerate the introduction of new products to market.

As I indicated earlier in my remarks, before this fiscal year is over, we intend to have at least two, possibly more new products. And what happens is that when we do that in an accelerated fashion, not only does it helps us to sustain our leadership in the market, but also it helps us in the -- in the margin when you are first to market, as you were asking that question earlier.

So I feel very good about that particular market.

The other thing I might add is that we continue to see the -- the accelerated adoption of video detection overall in the market. We see that in North America. We also see that to a good extent internationally.

Okay, great. I will let somebody else ask you questions. Thanks very much.

Thank you.

Representing Gruber & McBaine, your next question will come from the line of Eric Swergold.

Please proceed.

Hi, good afternoon and congratulations on yet another very good quarter.

Could -- you had a couple of very nice balance sheet improvements this quarter. It looks like your inventories worked down nicely and it looks like your receivables were also improving slightly during the quarter. Can you talk about kind of what happened on that end, or was it just sort of getting through some of the older inventory and maybe that perhaps would help the gross margin?

I will make a quick comment but then I defer to Jim to expand on it.

We have made a point of focusing on inventory and making sure that it is at a level that we are comfortable with. And, so therefore, in this first quarter, we reduced it by $500,000.

We have to realize however, that there are some of our customers that -- that we need to be prepared for certain key materials that we need to have to add some. But all in all, the way we have combined our engineering group has helped us quite a bit. Our purchasing groups are working together very nicely. And we intend to just focus on that and making sure that inventory's intact.

Jim, you may wish to expand on this please.

Eric, I think that pretty much sums it up. I mean, I wouldn't really call it a question of older inventory. There were -- there were some mix issues when we cut in the color camera for Vantage versus our monochrome camera, so we carried a little bit extra inventory. And then, just to meet volume demand in both AutoVue and Vantage, we carried a little bit higher level of inventory as we grew.

And we are getting to the point now where we are already understanding where that demand is coming from and right-sizing the inventory.

In terms of receivables, we have a dedicated team that we have actually expanded to work on billing and collection. So we have made some nice progress there.

Those two items have translated into positive cash from operations, from a cash flow standpoint of about $1.9 million for the quarter. So that's really where -- the balance sheet is improving and as a result of that, our cash from operations improved significantly from where we were a year ago. So that's really -- that's really the story there.

Okay. And then, same question I asked last quarter, any update on some of these kind of joint venture programs with some of the insurance carriers who have posted you on their Web sites or other programs for getting materials out in front of the trucking companies on your behalf?

Yes. Excellent question on that one, Eric.

We have now gone beyond that single insurance company that we were discussing several months ago. We now have several that we are actually actively having discussions. We are providing various materials. They are putting together programs to actually make the realms to go and educate a lot of the fleets.

So I am pretty excited about that and I look forward to its progress.

I believe that at some point we would see that program getting to a point that they would offer actual reduction in premiums, and we would also get some side benefits due to the educational components of it, basically. When (inaudible) from an insurance company, I believe it is just as important, if not more important, than they hear it from us. So that helps our sales in the short, medium and long run, as a matter of fact.

Okay.

And then one last question before I pass it off. On the traffic management side of the business, do you have an opinion as to -- with elections coming up and in a little over another year here -- do you have an opinion as to whether one party or another is beneficial to your product set or on your service set, or is it sort of such a pressing issue at this point that it doesn't matter whether we have a continuance of Republican Party or switch Democrat? Thanks.

Sure. Eric, both. What we have seen in the past, the reauthorization as an example, has been supported by both supported by both parties. Fortunately, traffic congestion and management and infrastructure is an area that really has a profound impact on all citizens, on all travelers.

And we are delighted to see that, essentially in every single platform, locally and nationally, there is a support for that. So I would envision that that support would continue as this alleviation and litigations of congestion is a huge issue in major metropolitan areas in U.S.

Okay, great. Thank you very much, good quarter.

Thank you.

Your next question comes from the line of [Bert Woodson] representing Riley Investment Management. Please proceed.

Hi, Abbas. Can you -- you mentioned you want to move the Company in a direction to be able to provide end-to-end traffic system solution. I would assume so you can bid on government contracts. Is that kind of where you want to [move in]? Can you kind of clarify that in going to what pieces you need to add to be able to do that and, I guess, how you are going to go about that?

Sure, that's a fair question. But I need to be a little bit careful in here for competitive reasons, not to get into too much detail.

But let me expand at this way. We have in the traffic management product in a way of detection, which we are expanding our offerings in some key niche areas. Right now we detect at the intersection. We believe there are some specific areas and adjacent markets that would really add value to expand upon.

And then when you look at our consulting business, we really provide a broad array of services that actually, by and large, is synergistically (inaudible) products. We do consulting in local jurisdictions. We help federal highway. We have one of the largest contracts with federal highway, call the -- called the national architecture, where we go around the country and actually provide standards and training for many of these operators of traffic management centers.

So by leveraging these two revenue streams and expanding in key areas that we may add some IPs to be able to truly provide end-to-end solutions, we feel that we could capitalize on the market in an accelerated fashion.

In the coming months and in other calls, I will be able to expand on it a little bit more.

Okay, that's fair.

And can you give any guidance on R&D for the rest of the year? Has that changed at all?

No, our R&D -- we believe in our R&D, in disciplined R&D. We feel that we need to continue to be innovative in order for us to grow properly. And so no changes for this particular fiscal year. I would envision in the coming years, we need to increase R&D in several key areas.

Great, thank you.

You are welcome.

Thanks for the question.

Your next question will come from the line of Frank Magdlen representing the Robins Group.

Please proceed.

Good afternoon and congratulations on a very nice quarter.

A couple of small of items -- but, Abbas, when you look at the growth strategy that you are looking at going forward, is it one of taking market share or is it getting additional -- what will be greater funding for traffic congestion, as an example?

Yes. Well, thanks for the question, Mr. Magdlen.

What I would envision is that not only that the -- that the funding is increasing, but also there are some specific market shares in some key areas that we could also penetrate into. So a combination of two is what -- is the overarching guidelines of our strategic plan.

All right. Just a couple of smaller questions. At one time you, talked about components shortages. Is that well behind you now?

To my knowledge, it is. Jim, if you have any other thoughts on this, feel free to jump in.

I mean, internally there is no particular component shortage that is a risk. But we are in an industry and an electronics business, where from time to time there are component shortages or components that go end of life. But currently, that's not a risk.

One particular risk that's affecting everyone in the industry is a changeover to all lead-free components. I believe it's called the RoHS. And we are in the process of converting some of our components to lead-free and our suppliers. And that's going to face everyone in the industry.

So there is a risk but just a industry risk for all suppliers of electronic components. But there isn't one particular component shortage right now that we are aware of.

All right. How many associates have you added in the transportation systems?

In the first quarter, Frank, we added six. Our plan for the year is to reach somewhere around 20. And we are on plan. And in fact, as we speak, I am pretty confident that that trend should continue.

All right.

And then, Abbas, with the prior guidance of maybe revenue growth of 15% to 18%. As you go out another 12 months or so in your strategic planning, are you inclined to raise your sights on that?

It would be premature, Frank, for me to comment on it. At this moment, that guidelines that we provided last quarter, 15% to 18%, and then I intend to, again, at the last quarter or this year to provide new guidance.

All right, thank you very much.

You are welcome. Thank you for the questions.

(OPERATOR INSTRUCTIONS)

Your next question will come from the line [Edith Jacobson].

Please proceed.

Ms. Jacobson, your line is open.

Should I ask my question?

Yes, ma'am.

I am an original stockholder of Odetics company and I have been in it a long time. And I have two questions to ask. One question is, how Iteris could get more PR? I read an article about lane changing, but they never mention that Iteris makes it, and nobody in my part of the country ever heard of it. And what is the -- that is one question I have.

The other question I have is, is there anyway to get Iteris off the American Stock Exchange, or at least to get them to list it in their listings?

Well, thank you, Ms. Jacobson. I am delighted that you are asking a question and you have been a long-time shareholder.

On the -- you have two questions. On the PR side, we focus on PR, but you got to realize that for much of our activities, such as one that you indicated, our lane departure warning technology, we through a very significant distributor called Valeo. They are one of the top ten tier auto suppliers.

So when you hear in the PR, in the prints, typically it is the like of Valeo or Nissan or really the 800 pound gorillas, if you will, its mentioned. But I take your comment to heart and try to see how we could find a very -- to really get the Iteris itself exposed.

On the AMEX, I really cannot mention a comment, Ms. Jacobson, at the moment. That's where we are currently with AMEX. And we are in close contacts with them, and we are pleased with their services.

Thank you for your questions, and I hope this is satisfactory.

There are no further questions at this time. I would now like to turn the presentation back to Abbas Mohaddes for closing remark.

Thank you very much, and again, we appreciate everyone's support and look forward to updating the investment community on our continued progress. Have a wonderful afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.