Iteris Inc (ITI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter for 2008 Iteris Incorporated Earnings Conference Call. My name is Stacy and I will be your moderator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS)

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

I would now like to turn the presentation over to your host for today, Mr. Jim Miele, Chief Financial Officer.

Please proceed, sir.

Thank you, operator.

And welcome to the Iteris second quarter 2008 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 financial results of our fiscal 2008 second quarter, and then Abbas will provide further commentary about our business. At the conclusion of Abbas' comments, we will open the call for questions.

Before proceeding, I would like to remind all 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 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 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 our second quarter ended September 30th, 2007, Iteris reported net sales and contract revenues of $17 million compared to $14.5 million in the same quarter of the prior year, or an increase of 17.4%. Our Transportation Systems contract revenues grew 20.2% to $6.2 million from $5.1 million in the prior year period.

Roadway Sensors net sales grew 9.4% to $7.6 million compared to $7 million in the prior year period; and Vehicle Sensors net sales grew 34.6% to $3.2 million compared to $2.4 million in the prior year period. The increase in Vehicle Sensors net sales is mainly a result of a 66.8% increase in lane departure warning unit sales from the second quarter of the prior year.

Gross profit for the second quarter increased to 42.8% from 41.2%. Operating expenses increased by approximately 2.8% to $5 million from $4.8 million in the year ago period, however, have decreased as a percentage of net sales and contract revenues to 29.2% from 33.4%.

The increase in gross profit is a result of gains in both Roadway and Vehicle Sensors. The increase in Roadway Sensor gross margin was primarily due to sales mix in terms of both geography and products. The increase in Vehicle Sensors gross margin was mainly a result of higher sales volume, which covered a greater amount of our fixed manufacturing overhead. Additionally, gross margins in both Roadway and Vehicle Sensors benefited from production efficiencies.

The Company reported operating income of $2.3 million for the current quarter compared to operating income of $1.1 million in the second quarter of the prior fiscal year. This is an increase of 104% from the prior year period.

Net income for the second quarter was $2.2 million, or $0.06 per share, compared to net income of $732,000, or $0.02 per share, for the second quarter of the prior year.

From a balance sheet perspective, our current assets continue to expand and our current ratio has expanded to 1.8 to 1.0. Total inventory decreased by approximately $1.1 million from last quarter as a result of decreases in both Roadway and Vehicle Sensors.

Inventory is partially down because we consciously decreased inventory level to take some pressure off our [move in this] September. We do not expect inventory to increase significantly through the remainder of fiscal 2008.

Last week, the Company expanded our line of credit with our senior lender from $8 million to $10 million. This amendment greatly increases our borrowing capacity going forward. Additionally, the interest rate on borrowings was reduced to prime plus 1%, resulting in a 25-basis point decrease from the previous rate. Our growth in profitability has continued to enable us to expand our borrowing capacity and strengthen our 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.

I am pleased with the results of our second quarter, particularly with the fact that we have again delivered record revenue for the quarter while maintaining earnings growth and expanding gross margins.

For the first time in Iteris' history, we reached $17 million in sales and operating income of $2.3 million. Each of our three business segments have delivered significant growth, both year-over-year and quarter-over-quarter. Here is some commentary on our business segments and their performance.

Roadway Sensors enjoyed another good quarter primarily due to continued adoption of our Video Detection Products and expansion of sales and marketing efforts throughout North America. In addition, we have had success in the international market as well, which confirms the attractiveness of our products and of the Iteris' brand for international partners to join forces with us.

Roadway Sensors also achieved a significant margin improvement of 460 basis points year over year is stemming primarily from product mix, pricing power given our first-to-market product availability, as well as overall production efficiency. We believe the adoption of video detection will continue to be as strong for the foreseeable future, and Iteris should be a prime beneficiary of this trend.

Transportation Systems also had a very strong quarter, growing over 20% year over year. We received several very significant awards including multi-year contract from a major state department of transportation, which arguably is among the most [discerning] clients one could win in our business, a fact that I'm very proud of.

Looking at the financials, our total backlog grew to an all-time high of $26 million, which is a 39% increase year over year. For Iteris, this is a very significant backlog; means both a stability and certainty of future revenue and a great base from which to drive the growth of the entire corporation.

I am also happy to say that we are achieving our internal hiring plans for new consultants, which will allow us to meet demand.

Our Vehicle Sensor segment also performed very well, with a 67% revenue increase year over year while maintaining profitability. During the quarter, we launched our advanced LDW technology, the world's first Lane Departure Prevention technology. It is introduced this fall in the '08 model of Infiniti EX.

On the commercial vehicle side, we continued winning trucking firms to deploy our technology. Melton Truck Lines, a premier air-ride flatbed carrier with significant long-distance business, will make Iteris' Lane Departure Warning a standard equipment on approximately 1,000 new trucks.

I have said at the beginning each business segment has continued to perform well. And as per my strategic agenda that I announced in the last earnings call, we are urgently working to make each one grow faster and more profitable than they have historically.

On operations and business outlook, we continue to see an increase in the volume of request for proposals and bids. In response, we have increased our marketing and accelerated product development. We have a pipeline of new products and services to be introduced in the coming quarters which should meaningfully contribute to sales and margin expansion going forward.

I am confident in our ability to meet the guidance for the year we provided the investment community at the beginning of this fiscal year.

In Vehicle Sensors, despite the current softness across many sectors of North American industry, including the trucking industry, there's a strong interest in our Lane Departure Warning technology from commercial trucks. And in fact, sales are strong for us in Europe and Asia for LDW.

The market pool for Active Safety Features such as LDW and LDP is being driven by a strong advocacy of the features by the press and more importantly government organizations, including the Federal Motor Carrier Safety Administration and National Highway Traffic Safety Administration.

I would like to briefly comment on the strategic review I have undertaken. As you know, I took up the CEO role in last March with a mandate to identify a strategy and initiatives for accelerated and sustainable growth, and, ultimately, to increase shareholder value.

Our Board and I have repeatedly met on this subject and we have already begun executing a revised higher growth plan. I would briefly sketch out a few highlights, but for competitive reasons, will refrain from detailed discussion.

First, I have said in the last call, our core market is traffic management. This is one of the key issues on today's political and social agenda nationwide. The spending on congestion management, in particular, is increasing. And because of our products and services Iteris offers, we are uniquely positioned to capitalize on this huge opportunity.

A minor albeit [for me] very important change we are making is to revise our corporate positioning and tagline. Whereas Iteris has historically called itself "a leading provider of outdoor machine vision systems and sensors that optimize the flow of traffic and enhance driver safety," which reflected the roots of the business.

We have now adopted a statement that is more reflective of today's Iteris and where we are headed. It reads as follows -- "Iteris is the leader in the traffic management market. Iteris is focused on the development and application of advanced technologies that reduce traffic congestion, minimize the environmental impact of traffic congestion, and improve the safety of surface transportation."

We at Iteris have lived and breathed this new corporate identity for several months. I hope this small step also helps other constituents, from our business partners to customers to, very importantly, our existing and prospective investors, better understand and recognize the much broader-based business and the various opportunities that make up today's Iteris.

Second, we intend to address the needs of this traffic management market with the application of advanced technologies, with Iteris serving as a provider of end-to-end solutions -- a role we can play.

Thanks to our broad-based and integrated offering and our strong starting position in the market, we have identified several initiatives that will further enhance our position and consolidate our efforts in that single direction of market leadership.

Third, our goal within the next two quarters, i.e., until the end of our fiscal year, will be growth from operational excellence and greater urgency. Of course, the operational excellence will continue beyond the current fiscal year when we will begin to benefit from other strategic activities.

Without going into details, we have started to execute against our plan. And I fully expect to do so without sacrificing profitability. Indeed, our overall financial results are geared toward accelerated margin expansion, as our Vehicle Sensors [segment term] profitability in Q1 and is now increasing its contribution to the overall results.

A noteworthy detail might be that in September we moved our headquarter offices to a new location more suited to our needs, in particular more efficiency and cost effectiveness. Furthermore, similar to combining our Engineering Groups, which I did shortly upon taking the CEO role in Q1, we have now combined our product operations affording us added efficiency and the streamlining of key activities.

I believe several other integration opportunities exist to squeeze profitability out of incremental revenues which we plan to deliver. I won't go into detail on what the value of sales and marketing plans entail, but we'll say that strategic alliances and partnerships of various forms will be key.

Our objectives in this regard are to add [GIP] expert staff as well as key account client relationships that help us further and faster achieve our objectives to become a leading provider to traffic management margin.

Also without being too specific for competitive reasons, I will mention a couple of the initiatives. One is our further penetration into the traffic information services, where we already have IP and we believe that there exists opportunity for significant expansion.

Another one would be providing video detection to certain underserved markets. We will share more of this video as we go.

Finally to be clear, the purpose of the strategic review and the planning exercise that [follows] is to create shareholder value. Therefore, my intention is to crisply focus Iteris as a business and do all I can to increase growth and profitability for the short and long run.

Parts of the plan are already being implemented and are starting to reflect in our financial results. Our staffs understand and are fully aligned with my sense of urgency to work hard to implement our strategic agenda.

In summary, again, I'm pleased with the financial results of the second quarter. We achieved key business objectives and were able to deliver strong revenue and profit growth.

I believe we have many opportunities for further growth and profit ahead. This concludes my remarks. We will be delighted to hear and respond to questions and comments.

(OPERATOR INSTRUCTIONS)

Your first question comes from line of Jeff Van Sinderen with B. Riley. Please proceed.

First, I want to say congratulations on the quarter.

I wonder if you can talk a little bit about how we should look at your margins for the second half of the year. You think you can deliver year-over-year gross margin increases of a similar magnitude for the remainder of the year?

Why don't I -- thanks, Mr. Van Sinderen -- briefly remark and then let Jim expand on it. One of the dynamics that is helping us is that we are trying to get new products first to market, which typically helps us to establish attractive pricing that does reflect in the margin expansion.

We also are enjoying a good expansion in our direct components of that segment. As you may know, in California we go direct and we enjoy a certain margin in that regard. I would envision going forward for the remainder of the quarter for us to be consistent. We will try to expand that margin to the extent possible. But I feel optimistic in the margin expansion going forward.

Jim, would you wish to add to that?

Sure, Jeff. This is -- it's another good quarter from a margin standpoint. Year-to-date, through the six months, the margins are approximately 44% compared to around 41% in the prior year.

If you recall the guidance I gave in June, we expected to expand our margins slightly, roughly into the 42%, 43% range. So they're a little bit better than expected but in line with the guidance and we are not ready to provide much new guidance on the margins going forward.

Okay, fair enough.

And then let me ask you about Mexico, because I noticed you guys are starting to do some business there. You have got an original contract of, I guess, $420,000. We are just wondering if that is just the tip of the iceberg. Does that become a much bigger business than the original contract, or how should we look at that?

Well, thanks for the question.

We consciously have began at the beginning of the year to expand our international presence and business development a little bit more than we have exhibited in the past. And I believe that that's -- that revenue, that award stems from that effort that we began.

I would envision that we would continue receiving awards. We have in fact two or three in the pipeline from South America and elsewhere. In fact, one that we would be doing an announcement soon. So that is a component that we haven't really had a whole lot in the past.

And by the way, we are not significantly investing in that at this point. But we are gradually expanding our international presence. I believe that that's one area that the partnership with many local entities would really bear fruit, because we believe that our product is quite attractive and that particular award was really testimony to that fact.

I have recently have taken an international trip and really -- with discussion with many potential partners and prospect buyers that our product is very well liked. It has been around for many years. And I feel good about that.

Okay, great.

And then, let me ask you as far as the truck market goes, you are continuing to gain traction there. And just wondering how we should expect the progression of growth to look going forward for the truck fleet market. Should we expect that to be steady? Should it accelerate from here? I know you have a lot of different fleets that are in process at this point to convert.

And also, how should we look at the softness in the U.S. truck sales market? Is that being offset by international? Should that continue? Any other color you could give there would be helpful.

Yes, excellent question. Let me address the second part of it first. We do hear, as I'm sure you all are, the softness in various industries, and trucking in particular in North America. And we have been quite fortunate as far a number of fleets keep signing up and wanting to get samples, and that has been expanding as a matter of fact.

How it really turns into actual sales? We may end up trying to balance the possible softness of that with the strong Asian and European OEMs that we have been experiencing.

At the moment as we speak, we really haven't seen softness in our sales in North America. Going forward, of course, we are cautious like others. I couldn't really make any additional comments or add any more color but, but I do feel comfortable that we are headed to try very hard to meet our sales plans overall for the Lane Departure Warning for the quarters to come.

Okay, good. I will let somebody else jump in and ask questions, and I will get back in queue. Thanks.

Thank you.

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

Good afternoon, and congratulations on a very nice quarter.

Thank you, Mr. Magdlen.

When I'm looking at your SG&A and your R&D expenses, and you mentioned that you combined some of your R&D or Engineering Groups, is that new number a reasonable number going forward for expense?

Well, thanks again, Mr. Magdlen. Let me make a couple of comments.

We plan to meet our annual plan of what we have put in as far as the overall R&D expenditure. I do believe that going forward, because of that operational adjustment as well as combining the operations -- so now we have not only Engineering but operations of the product side of the house is combined -- going forward, we would benefit some efficiency and cost effectiveness.

How much of that would be reflected in immediate quarters? To be seen. I would imagine there will be some; I hope there will be some. But, certainly, in the long run we would see some material benefit there from that combination, not only from G&A, I might add that just from overall operational streamlining of activities, there is quite a bit of efficiency when you do such combinations.

Well, and then, I guess that begs the question, what is the -- what was your R&D expenditure plan that you may have talked about? I mean you did--

Yes, I wouldn't be able to -- let's see -- give anything more than what we have published as part of the overall plan.

Jim, do we have any more data at this point to provide Mr. Magdlen with?

No. We did not provide specific guidance on individual line items in the P&L. If you recall, we gave the top line guidance and some indication of what we thought our margins would do. And then the guidance for the individual items on the P&L was basically that they should track similar to prior year's expenses and we would see some benefit in terms of a decrease as a percentage of total net sales and contract revenues.

This quarter, we enjoyed, as a percentage, we were down under 30% and in the prior quarter 35%. We have traditionally been in the 33% to 35%. Going forward, I think that we will track in a similar fashion to prior quarters.

I should just add, and echo what was said, that our intent, Mr. Magdlen, is to be more efficient and what that means is that reduce G&A as a percentage of sales and expand the margin and expand the operating income. I mean, that is where we are headed. And so there are a variety of activities that we have just started that we will be doing to follow that path.

Well, it certainly showed up in this quarter's numbers. But, if I'm hearing you, they might trend up a bit in the future quarters more in line with guidance. Are you doing much in the way of product development? Is there -- should we expect to see some increases in that area going forward?

We -- this fiscal year that we are in, we would be consistent with what we have assumed in the way of expenditure. But we do have a pipeline of products and services that in the coming quarters we will introduce.

So there is a tremendous amount of activities going on, but certainly not sacrificing the operating income that I would like to achieve -- but you see the trend, the way we are reporting it.

Well, then what is the headcount for the categories of SG&A and, say, R&D and expenditures where -- I know you've grown your associates for the Transportation Systems side of the business but, what's happening at corporate then?

Yes, that's a fair question. I would just give you the overall -- this year, we have added about -- fiscal year, a little bit over 20 heads, maybe 22 heads or so. The majority of them are engineers and scientists and software people, but, of course, we are adding some to support the infrastructure part and the corporate part as well.

But, collectively on the SG&A, it is not following the same percentage of the trend of the growth. It is -- I always, in my mind - I'll just tell you this, for every point of growth, I like to spend less than half of that as a percentage when it comes to supporting the infrastructure.

So we will continue adding support staff as well as primarily quite a bit of engineering folks to help us with all the backlog that we are experiencing and all the products that we have in the pipeline.

All right, just one or two more questions and I'll jump back in the queue. In the past, you had indicated there were some component shortages or long lead times. And with the reduction in inventory, is it safe to assume that you don't have any real bottlenecks or shortages?

Not at this time. Nothing besides what we typically put in, in our risk factors, in our Qs and all of that. I'm not aware of any material adverse impact to any of our operation at this moment.

All right, thank you very much.

Thank you.

Thank you.

Your next question comes from the line of Jim McIlree with Collins Stewart. Please proceed.

Thanks, good evening. I think most of my questions were asked by the prior questioner, but can you explain how long the backlog is expected to take until you burn that off?

Yes, Mr. McIlree. Typically, the backlog that we get would have perhaps two, maybe three components. And part of it is projects that might be, let's say, up to six months; then there are other projects that typically go for about a year or so. And then a small percentage of the backlog would be multi-year contracts.

If I have to make a general estimate, of the $26 million backlog that we have, I would estimate that about 70% of that is perhaps attributed to our next fiscal year. In other words, we are five months or so ahead of the next fiscal year and already enjoy 70% of the backlog for the next year. So that's -- I hope that helps.

That's does help. And I just want to make sure that I heard it right. When you talk about the strategic plan that you're working on -- a lot of times when I hear that I think of companies investing a lot more in SG&A and R&D in order to bring products to market, bring new products to market, develop new channels.

But I also heard you say that you would like to have the OpEx grow at half the rate of sales. Do you think you will be able to accomplish that, to bring new products and develop new channels at that type of incremental margin?

I believe so. I believe that we would continue investing strongly in the R&D. I think that one would continue. I wouldn't be surprised if we significantly expand that as a percentage of sales, what we have done this year for the next year.

But, at the same time, I believe that there are efficiencies and cost effectiveness that we could do, not have to expand the G&A component of the activities that we are going through.

So in combination, I believe that we ought to -- we ought to be able to go forward, enjoy the operating income that we expect and grow significantly beyond what we, what we have been reported. So I think there are ways to do the right thing.

That's very helpful. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS)

We have a follow-up question from the line of Jeff Van Sinderen with B. Riley.

Please proceed, sir.

Yes, can you update us on the passenger car market for AutoView and the emergence of Land Departure Prevention technology? What -- how does that technology or that new technology potentially impact your business there?

Well, absolutely. We are very excited about that and we've issued a press release not too long ago, a couple of weeks ago or so.

That technology is perhaps the next generation of our Lane Departure Warning. This is Lane Departure Prevention -- envision that if you are getting out of the lane and it nudges you back in; of course, you have -- the driver is still overall in control.

And we believe this is an exciting technology. Nissan is putting it on the Infiniti -- that's Crossover SUV Infiniti EX that is coming to market this fall. Although the magnitude of penetration and magnitude of sales is unknown to us -- but we feel good about the fact that Valeo and Nissan together have worked very hard to introduce that at this point to market.

I'm headed to Germany this weekend. We are having the meetings with our two customers and Valeo, and discussing other opportunities. I'm optimistic overall about the acceptance of the active safety devices in the car market.

You know, it has taken some time but we see that expanding, not only in ours -- and I think I've said in the past, it's sort of a two-edged sword when you see competition is moving in. And we see competitors are moving in and various luxury cars are opting to adopt them.

And I couldn't get into too much detail but, I believe that Valeo is discussing with other OEMs as well. And we would hope that -- of course, it is hard to anticipate a specific schedule but, we would hope that we would get another OEM onboard in the car market soon.

Okay. And then, as far as the prevention part of that technology, is there anybody else out there who's got a product that is actually going to be on a vehicle that is Lane Departure Prevention beside from you guys?

We -- at this moment, as we speak, we are not aware of any particular vehicle that actually is on the market. But we do realize that there are some of our competitors, at least one in particular that is planning to offer something along those lines.

Okay. But you really are the first to market in this case?

Absolutely.

Excellent. Thanks very much.

You're welcome.

(OPERATOR INSTRUCTIONS)

There are no further questions in the queue.

Okay. Again, we appreciate everyone's support and look forward to updating the investment community on our continued progress.

And thank you, Stacy.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. And have a good day.