Iteris Inc (ITI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Iteris Incorporated Earnings Call. My name is Melanie and I'll be your coordinator today. At this time, all participants are in listen only mode. We will conduct a question and answer session at the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Mr. Jim Miele, CFO. Please proceed.

Thank you, operator and welcome to the Iteris fourth quarter 2008 conference call. I'm Jim Miele the Chief Financial Officer of Iteris and I'm joined today by Abbas Mohaddes, the Company's CEO. First, I'd like to recap the financial results of our fiscal 2008 fourth 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'd 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 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 fourth quarter ended March 31, 2008 our net sales and contract revenues increased by approximately 10% to $17.1 million, compared to $15.5 million in the same quarter of the prior year. The increase in net sales and contract revenues was a result of a 20.4% increase in transportation systems revenues which grew to $7.0 million and an 18.9% increase in vehicle sensors revenues which grew to $2.9 million. Roadway sensors net sales were flat year-over-year at $7.2 million. Abbas will provide more detail regarding net sales and contract revenues later in his comments.

The Company reported operating income of $2.3 million for the current quarter compared to operating income of $1.2 million in the same quarter of the prior year or an increase of 90.6%. Gross margins for the fourth quarter increased 70 basis points to 43.6% from 42.9% in the year ago quarter. The increase in gross margins was a result of margin improvements in both transportation systems and vehicle sensors. The increase in transportation systems gross margins was attributable to a favorable contract mix while the increase in vehicle sensors gross margins was primarily the result of increased sales volumes and production efficiencies.

Operating expenses decreased by 5.6% to $5.2 million compared to $5.5 million reported in the year ago quarter. Included in the current quarter operating expenses was a $278,000 non-cash credit related to the decrease in value of Iteris stock held in the Company's non-qualified deferred compensation plan. The majority of Iteris stock held in the plan is owned by the Company's former CEO and is scheduled to be distributed early next week. Thereafter, we intend to dissolve the plan.

Net income for the fourth quarter was $7.9 million or $0.23 per share compared to net income of $1.6 million or $0.05 per share in the same quarter of the prior year. Included in current quarter net income is a $5.7 million tax benefit. The Company analyzed its overall tax position as of March 31, 2008, and determined it was appropriate to increase the value of its deferred tax assets to almost $9 million from $3 million in the prior year. This determination was made based on the Company's estimate of future taxable income and the Company's recent history of generating taxable income. In the future, the Company may continue to record similar adjustments to our net deferred tax assets as the Company updates its estimates.

During fiscal '09, the Company expects to record quarterly tax expense with an effective rate of 40%. Fiscal year end 2008 net sales and contract revenues were $65.2 million compared to $58.3 million in the prior year or an increase of 11.8%. Operating income for our year ended March 31, 2008 was $7.3 million or 11.2% of total net sales and contract revenues compared to operating income of $3.8 million in the prior year while net income for the year was $12.2 million or $0.35 per share compared to net income of $2.9 million or $0.09 per share in the prior year.

Turning to the balance sheet. In February, the Company retired 2.1 million in convertible debentures for 1.8 million, reducing the total debenture obligation to 7.8 million. Funds borrowed on the line of credit to repay these debts were repaid by the end of the March quarter, leaving no borrowings on the line of credit at the end of the quarter. Additionally, there are currently no borrowings on the line.

Repayments on our line have been facilitated through internally generated cash flows. On that note, our operations provided positive cash flow of approximately $2 million for the current quarter and were approximately $7.5 million for our year ended March 31, 2008. The Company's financial position continues to get stronger as we increase profitability and pay down outstanding debts. Now I'd like to turn the call over to Abbas who will further discuss the quarter and our strategy in greater detail. Abbas?

Thank you, Jim. I'm pleased with the results of our fourth quarter as well as the fiscal year. Iteris continued to execute on its strategic and operational plans to deliver improved earnings and gross margin expectation as well as offering new products and services to market. I'm delighted Iteris has achieved a record operating income of $7.3 million, representing 91% increase year-over-year.

Execution of our strategic plan initiatives to accelerate the business, drive efficiencies and generate more earnings are paying off and providing tangible results thanks to the progress we made in the business and the profits generated over the last four quarters. We have also been able to significantly reduce our debts which has improved our financial strength and gives us more flexibility in our business. We currently have no borrowing against our line of credit and have retired $2.1 million of long-term debt during the quarter.

Now here is more detailed commentary on our performance. Revenues derived from transportation systems services grew over 12% year-over-year. We received several significant awards during the quarter and entered the new fiscal year with $24.6 million of backlog which is 22% higher when compared to our backlog a year ago. This level of increase in backlog provides us with the stability and better visibility regarding our future performance.

In the news, we hear about softness in the economy impacting much of the consumer based industries. However at Iteris, we have been fortunate to date with the public works projects as, by and large, continue deployment and in some cases expanding, which we believe will directly benefit us in future quarters.

We have also completed our hiring for new staff that will help us meet expected demand in the current fiscal year. During the last fiscal year, we have added net 26 associates to the Iteris team in the areas of engineering, planning as well as sales and marketing. This is a significant achievement for us, as having the right people in this space is a key enabler for revenue delivery and we are right on plan in this area.

Roadway sensors enjoyed another good quarter. We saw a strong demand, primarily due to continued adoption of our video detection products and expansion of sales through North America. While we don't know the full impact of uncertainties in the domestic economy, we still had a good quarter even under these more difficult economic circumstances.

Margin improvement from roadway sensors is primarily from favorable product mix and our ability to maintain pricing power. By focusing our products that are first to market, we plan not only to build upon our leadership with new technologies, we also hope to continue to enjoy enhanced margins.

In addition, with some of the operational changes we have made, we are now beginning to realize production and engineering efficiencies. We have released several new products last year in the video detection space and have a healthy pipeline of new products coming to market during this year. In fact, at the beginning of this quarter, we announced our latest product, VersiCam, during the largest international traffic management trade show, [Inner Traffic] in Amsterdam, when it was well received.

We had begun shipping this product in May. This particular product is designed for certain underserved markets and price competitively for international market. We continue to be optimistic about our leadership position as well as the opportunity to have -- opportunity we have to further expand the size of our addressable market.

During the last call, I indicated for Q3 we saw fewer than expected orders from one of our significant customers, the State of Texas, which reduced orders primarily due to a funding shortfall. I am pleased to say booking and sales in Texas are improving. The revenue derived from sales of vehicle sensors products was up over 25% during the fourth quarter compared to same quarter a year ago. Importantly, while achieving that growth, vehicle sensors maintain profitability in every quarter this year, a chief target we have set for the team.

Our passenger car distribution partner, Valeo, a global TR1 automotive supplier, continues to seek new opportunities with other automobile OEMs. On the commercial trucking front, we expanded our list of North American trucking fleets that have standardized our LDW system to a total of 62 fleets with an estimated 45,000 trucks.

Sales remained strong in Europe and Asia and a market [poll] for active safety features such as LDW appears to be developing in these geographies. The market, however, in North America is soft due to the impact of the overall trucking industry softness, resulting in less truck purchase and reduction in safety features and options expenditures. However, we expect to gain the strength in the second half of the year.

During the fourth quarter, we announced our latest product, Safety Direct, which has been well received and we are currently working with key partners for sales of this promising product. Safety Direct provides the operators and fleet managers real time lane departure information altering them of possible safety issues proactively. I'm also happy to say that we're working on additional new products and strategic partnerships to continue accelerating our growth.

I would like to comment more broadly on operations and our business outlook. We continue to see steady increases in the volume of requests for proposals as well as the number of bids we are submitting in transportation systems. We are starting the year, as I indicated, with a 22% increase on the backlog year-over-year. We have increased our marketing and in our view this is critical to ensuring that we build out a leadership position for the long run.

As I have mentioned in the past, our objective is for Iteris to achieve growth while maintaining profitability. For example, our vehicle sensors segment continues to improve profitability as it increases sales and has raised its contribution to the overall results of Iteris. That profit focus is a key element of our instituted plan and the plan to maintain this focus.

At the same time, going forward, we plan to accelerate the revenue growth which is also a key metric in our strategic plan. The same focus and urgency with which we aim for profitability and revenue is expected to apply to the way we go about managing our balance sheet, our working capital and achieving a good return on assets and investments.

We are particularly pleased with operating cash flow improvement of over $9.0 million year-over-year resulting primarily from improved profitability, helping us paying debts and improve our balance sheet. A year ago we had an $8 million line of credit with over $4 million borrowed. Today, we have $10 million -- we are at the $10 million line of credit.

We have zero draw down on the line and have been able to retire $2.1 million long-term debt. Jim and I will be working hard to continue enhancing our balance sheet and working capital. In addition, Jim has been focusing on operational efficiencies regarding inventory management, accounts receivables and payables and similar metrics. This focus on efficiency goes hand-in-hand with our broader operational excellence initiative.

Finally, we plan to maintain a commitment in our strategic plan to expanding into new markets especially through OEM and channeled partnerships. We are in discussions with several potential partners and expect that these relationships will help us solidify our leadership position in our market. We will continue sharing more of this with you as we go.

Going forward, I see a continued growth opportunity for the traffic management market both domestically and internationally and Iteris will be a direct beneficiary of it. Our guidance for the revenue in this coming year is for 11% to 15% annual growth with continued operating income growth.

In summary again, I'm pleased with the results of the quarter and the year, particularly with regards to the strong operating income and underlying momentum. Order book, backlog and revenue are strong and believe we have many opportunities for increased growth and profit. My team and I will continue to work hard to keep improving the Company's financial performance and build stockholders value. This concludes my remarks. We will be delighted to respond to questions and comments you might have.

(OPERATOR INSTRUCTIONS)

And our first question comes from the line of Frank Magdlen with The Robins Group. Go ahead.

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

Thank you, Mr. Magdlen.

In the line usage, I know you don't have anything to borrow -- drawdown on the line but you also say that there's only about $8 million available. Is that because there isn't the available -- you don't have the receivables or the inventory against that?

It's an asset based line of credit with a maximum borrowing capacity of $10 million. There are a few LCs that we have earmarked against the line for certain jobs that have bonding requirements that would cause a drawdown but no cash borrowing. And then you're correct that it's based on the formula of assets and inventories. So it fluctuates from the $8.5 million range and sometimes can exceed $10 million and so at the particular date in question March 31, 2008, of the $10 million line of credit, $8.6 million was available with no borrowings.

Okay. And then Jim could you review the tax situation again?

Sure. We have the benefit of a very large federal net operating loss carryforwards that we acquired when we merged with the parent company several years ago. We've had a pretty large reserve against the usage of those assets because the Company did not have a long enough history of generating taxable income.

Since fiscal 2005, we've been increasing profitability and operating income as well as our taxable income and we got to a point this year where we made a determination that we felt comfortable reducing a certain amount of the reserve against those tax assets which will ultimately be used to repay taxes payable. So the offset of reducing the reserve on our tax asset -- this credit we've recorded on our P&L. The net asset is probably in the neighborhood of $16 million.

We have about $9 million recorded so there is a possibility that in the future we will continue to be able to take advantage of that, but we're going to start analyzing our tax position on an annual basis rather than a quarterly basis. So it's a nice increase on the P&L but going forward we'll be booking tax expense at 40% tax rate and we'll be using the credit that we've established on the balance sheet to pay those taxes.

And so you actually have a cash tax to pay in '09?

We should -- well for fiscal '09, we should not, other than maybe state taxes and some other taxes that we wouldn't be able to use the NOL to pay for. But it's still really way too early to determine, but we will be able to offset the majority of taxable income in '09 with the benefit.

Okay. And, Abbas, just one more question. On the video detection for intersections what percentage of the intersections do you now can address with the product line that you have?

Currently what we estimate is that the 10% to 15% of the estimated U.S. 325,000 signal intersections are equipped with the video. So we have a lot of room to grow there and the point I should also make is that, whenever you have a new intersection or a refurbished intersection, what we have seen is approximately 50% of those go to video as opposed to the legacy or other types of detection.

Well, okay. I understand that. But what I'm saying is there an intersection where video is not price competitive yet?

Oh, I see what you're saying. Well you know, when you have much smaller, let's say, intersections sometimes intersection that have a less number of lanes, there could be semi-actuated. From time to time, we might come across a situation that one would say that might be tough to offer video. But one thing that we have done, and this is the beauty of this latest product that we have offered to March, as I indicated in my remarks, called VersiCam.

It is price competitive and in fact it is designed to provide detection for underserved intersections. And again, examples of that would be, let's say, minor intersection meeting a major intersection which you may not put in detection on the major legs of the roadway but on the minor you want to. So in that, this new product would help out quite a bit and that's why we believe that the continued introduction of the products to markets that we haven't served before really help us to expand our growth.

So you say your product line is good for what percent of the intersections then?

It would be hard to estimate, Frank, but there are -- there is a very large number of intersections that are what we refer to as semi-actuated. That they do need detection. However, in the past, it could have been expensive to use video detection because you might end up just putting -- let's say, if you were to use loops, one set in each direction. And now we believe that we could be price competitive by using this new product which is video based and again would be easy to use, easy to install, easy to maintain. We believe that we maintain 98% or better accuracy, so we believe that that should help us continue our leadership position in the market.

All right, thank you and I'll jump back in queue.

Wonderful.

Our next question comes from the line of Jeff Van Sinderen with B. Riley & Company. Go ahead.

Hi. This is [Sam Nam]. I'm filling in for Jeff.

Can you repeat that please?

Oh yes. My name is Sam Nam and I'm filling in for Jeff.

Well, thank you. Welcome to the call.

Thank you. I like to first start off by asking about current quarter of Q1 and how business is tracking so far.

I'm sorry. Your question is for Q1 regarding?

How the business is tracking so far.

Oh, I see. Well you know, we typically don't make any specific guidance on quarterly basis. You know, we provide guidance for the whole year and it would be very difficult for us just because of the market dynamics and the composition of our revenue streams to make any specific projection for the quarter.

Okay, okay. Then can you talk a little bit more about development in the truck market and where you're seeing the opportunities and how the competitive landscape is changing?

Absolutely. What we have seen -- the lane departure warning development and the really traction is expanding both in car and the truck market. In truck market we go two ways to the market for -- we go to OEMs direct and we have the majority of those OEMs. Our product is standardized. The other way that we sell is also direct for after-market and that's where we continue selling to primarily large fleets.

These are fleets that have, let's say, over 300 trucks and if they are two or three years old or younger, they are a great target for our market. So what we do is we sell to them. At the moment we have 62 fleets that, when you add up the number of trucks that they have, it exceeds 45,000 that have used our samples and using Iteris as a standard for their fleets. And we look forward to selling a significant amount of LDW technologies to them. You've got to realize that currently the overall trucking industry is soft.

It has been for a few quarters. We have been quite fortunate that in Europe and Japan, the sales have been as steady, as strong, in fact has been expanding a little bit despite the fact that it has been soft in North America. So what our hope is that when that North American trucking market gives us some traction and gains us strength, we would be the beneficiary of that growth again.

Okay. And can you update on any changes that would impact your Vantage business, the [camera]?

I'm sorry.

Any update on changes that could impact your Vantage business?

Well as I indicated, we introduced a new product just this last April and we have begun shipping. What we focus on in the roadway sensors is to continue offer new product to market in a timely fashion. And that helps us not only our leadership position in the market, but also helps us in margins. And we have a strong pipeline of products that I would expect to introduce to market during this fiscal year. We always see, of course, competitors to come to this market and we watch that closely. At this time, I'm pretty comfortable that we continue enjoying the good growth in that particular revenue stream in this fiscal year.

Okay. And is there any new developments that you could talk about on auto view in the passenger [air] market is there -- and how's the competition doing there?

Absolutely. Well we are working closely with our partner, Valeo, that they are the distributor that take our technology to car market. In fact, I'll be traveling to Europe in a month visiting with them. Again, they continue seeking Valeo's OEMs, Valeo's platforms even within Nissan that we are already on three different platforms.

We have also seen traction in demand in the lane departure warning and that's, of course, a two-edged sword. In one hand we'd really like to see that traction. At the same time, it attracts competitors, so we have seen competition on the rise in that market, but overall we feel pretty good that our opportunity in the car market would expand.

Of course, you realize that it is very difficult to estimate the time when we would actually execute an arrangement with a particular car OEM. So that is one of the things that was very important to us to get, to profitability in that revenue stream, so that we don't really get into a situation that we are waiting for a long time for a particular product to get into a platform and counting on a revenue or royalty that might be difficult to attain. So overall, I feel very optimistic about the opportunities in that market.

Okay. Just a couple of more questions. I noticed that the gross margin increased this quarter. Is the increase sustainable?

Of course, what we try to do is not only sustain the margin but try extremely hard to improve upon it and, if you look at the last several quarters, that would be a good data point to look at. I would not comment specifically as to the magnitude or quarterly basis, but I feel pretty positive about our margins going forward.

Okay. And finally, can you -- do you have the figures for the depreciation and amortization and CapEx?

Sure. This is Jim. The depreciation for the quarter was about $220,000 and capital expenditures for the quarter were right around $200,000 and the only amortization that's in operations is delineated on the P&L, the amortization of the intangible assets at $37,000.

Okay. And do you have a stock based comp figure?

The stock based figure, I don't have it in front of me, but it's roughly $100,000 per quarter.

Okay. Thank you very much.

Okay. Thank you.

(OPERATOR INSTRUCTIONS)

Our next question comes from the line of Eric Swergold with Gruber McBaine. Go ahead.

Good afternoon and congratulations on a strong quarter. Most of my questions have been answered but could you speak to what type of service business you're developing or after-market business you're developing on the truck side of the business? Is there some form of recurring revenue you can get or some form of service with some of your newer products? Thank you.

Thank you, Mr. Swergold. I appreciate the comment. Yes. As far as the activities that we are doing in the after-market, we introduced to market the Safety Direct, that we announced a couple of months ago. We are actively seeking opportunities and partnerships with those that could help us and not only sell our lane departure warning, but also provide them with the kind of real-time information that many of the fleets have been asking for for some time. We have visited many of these fleets.

Their desire is to get this type of safety information, so that proactively they could see a truck driver that is driving, let's say, on highway 80 in Iowa and is drowsy. A fleet from Los Angeles could alert him or her and say that, look, you know, maybe it is time for you to take a break. We believe that this is a breakthrough in safety offering -- active safety offering and we have seen a good response to that. And as we forge those strategic partnerships, obviously we would keep you informed and we would be making announcements.

Thank you.

Thanks for the question.

Thank you.

Our next question comes from the line of Joe Giamichael with Rodman & Renshaw. Go ahead.

Good afternoon, gentlemen. Congratulations on the quarter.

Thank you.

Most of my questions have been asked at this point. Just on a couple of side questions. You mentioned the strength from the public works programs, rather, and I think most the headlines we see are about tax receipts, shortfalls and difficult budgetary decisions being made. At this point, you haven't seen anything that would indicate that sort of belt tightening that's going to impact your projects or the bidding environment as a whole?

Excellent question. You know, I indicated our backlog year-over-year in that public works activities infrastructure increased to the tone of 22%. But there are some factors that we need to really be mindful of that would have an impact on FY'09. You realize that this is an election year and many public agencies do their budgeting cycle to the extent that, at times, that might be delayed.

It may have an impact. At times we have seen them they speed up, which has a positive impact. We also believe that when you look at some of the federal funding, the reauthorization this year would be the year to get ready for the next one. There are sometimes uncertainties. Of course the economic condition uncertainties typically have an impact as to how you set your budget, when you spend it. So what we try to do is maximize on our backlog to weather that uncertainty to the extent that we can.

At the moment, we have not seen any material impacts on the backlog or such significant delays in key customers that would make me feel that I need to be quite cautious. So I maintain my optimism on the health of the infrastructure market going forward. We would know a lot more in a couple of quarters. We are keeping a very close eye on activities of not only the federal but also state, as well as local agencies. Some states experience a bit of a delay.

Some states are expanding a little bit. Case in point would be California. Last year, California passed a $19.9 billion bond called Proposition 1B. Well now we are benefiting from some of that funds floating in the market in light of the fact that California, as a state, is experiencing some budget challenges. So in combination, so far we haven't seen, as an example, any adverse impacts in the funds that would be benefiting us in the State of California. Thanks for the question.

So just -- I guess on a federal or municipal level you haven't seen any sort of slowdown from a bidding or an RFP standpoint then?

That's correct. We have not seen overall trend. We have seen pockets, you know, here and there. At the same time, we have seen pockets that are expanding. So overall, as I indicated, I maintain my optimism.

Okay, great. And just last question. You know, you had sort of promised to improve operations and create a more profitable model and you've certainly delivered on that over the course of this year. In the guidance you've given, you gave us a revenue growth rate and you said that you'd hope to increase operating income. The operating margin for this quarter was about 13.5%. Assuming we see the 11% to 15% revenue growth, should we expect to see margin expansion along the same sort of incremental margins you've shown thus far?

Well, you know, I think the best way I could describe that is that I'd like to refrain from a specific margin guidance, but I believe that you're on the right track in the way that our intent is to continue expanding our profitability. Continue grow. At the same time, we are spending R&D money. Increased expenditure, as a matter of fact, for reasons that I explained earlier and I elaborate now for maintenance of the leadership position for us to get the right product to the market in a timely manner.

Have a very strong pipeline of appropriate products. But the overall -- the goal is to improve upon profitability, maintain and improve upon margins. So that is something that is key pillar, if you will, of our strategic plan and we are very focused on that.

Fair enough. I won't hold you to any margin guidance and thank you very much. Congratulations on the quarter.

And thank you very much.

Our next question comes from the line of Chris Biles with CJB Capital Management. Go ahead.

Thank you. All my questions have been answered.

Thank you, Mr. Biles.

Thank you.

And our next question comes from the line of Peter Conley with MDB Capital Group. Go ahead.

Hi guys. Congratulations on a nice quarter. Most of my questions have been answered but wondered if there was any update on demand pull from insurance companies for LDW or LDP?

Yes, sir. We have been working with them continually. In fact, recently we have attended a few meetings and seminars and conventions of that industry. We are working closely with several of them at the moment in sort of an educational activities, where we go to meetings. Provide the literature and provide the benefits of the LDW and the fact that active safety, all the literature and research that we have done.

Testimonials that have been provided by our -- many of our customers. So educational mode is what we are doing. At the same time, some of the companies are telling us that they are really pursuing opportunities. Finding a way to see if they could bundle future such ads -- LDW in an attempt to provide discounts for those that are adopting it. So it's an ongoing process. When do we really hit the jackpot on that is questionable timing-wise, at this point. Thank you for the question.

Thanks, Abbas. That's it for me.

(OPERATOR INSTRUCTIONS)

And I show no further questions at this time. I'll turn the call back over to Abbas for closing remarks. Please proceed.

Thank you, Melanie. Ladies and gentlemen, again, we appreciate everyone's support and look forward to updating you on our continued progress in our future call. Have a great afternoon and weekend.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.