Iteris Inc (ITI) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter fiscal 2009 Iteris, Inc. Earnings Conference Call. My name is Nikita and it will be my pleasure to assist you today. At this time all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference.

(OPERATING INSTRUCTIONS)

I would now like to introduce your host for today's call, Mr. Jim Miele, CFO. Please proceed, sir.

Thank you, Operator. And welcome to the Iteris first quarter 2009 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 2009 first quarter and then Abbas will provide further commentary about our business. At the conclusion of Abbas' comment, 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. 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 any contained in the forward-looking statements.

For the first quarter ended June 30, 2008, our net sales and contract revenues increased approximately 11% to $17.4 million compared to $15.8 million in the same quarter of the prior year. The increase in net sales and contract revenues was mainly a result of a 25.5% increase in transportation systems contract revenues to $6.9 million compared to $5.5 million in the prior year quarter.

Also in the current quarter, vehicle sensors net sales increased 2.6% to $3.1 million while roadway sensor net sales increased 2.8% to $7.4 million. Abbas will provide more detail regarding net sales and contract revenues later in his comments.

Gross margins for the first quarter decreased 60 basis points to 44.4% from 45% in the year ago quarter. This slight decrease in gross margins was primarily a result of an increase in contract revenues as a percentage of total net sales and contract revenues.

Our contract revenue gross margins are lower than our product margins and are typically in the mid 30% range. This decrease, however, was partially offset by a 50 basis point improvement in gross margins derived from our product sales. Product sale gross margins were 50% for the quarter compared to 49.5% in the year ago period.

The Company reported operating income of $1.4 million for the current quarter compared to operating income of $1.6 million in the prior year quarter. Included in the current quarter results were focused investments and R&D in sales and marketing end up bringing new roadway sensors products to market and winning additional business mainly in our transportation systems consulting segment.

R&D expense increased $216,000 or 21.7% compared to the prior year period, while SG&A increased $596,000 or 13.4%. Additionally, the Company's 2008 stocks compliance efforts were successfully completed during the current quarter.

As a result of the investments in R&D, sales and marketing and stocks costs, current quarter operating expenses increased by 16% to $6.4 million compared to $5.5 million reported in the year ago quarter.

Net income for the first quarter was $666,000 or $0.2 per share compared to net income of $1.1 million or $0.3 per share in the prior year quarter. In the prior year quarter and for the entire year, our net income was positively effected by tax benefits generated through the release of valuation allowance against certain of our differed tax assets. This results in an effective tax rate of less than 40%. Going forward, we expect to experience and effective tax rate in the low 40% range.

With that said, there are approximately $6 million to $8 million of additional unrealized differed tax assets in addition to the $10.3 million that we currently have booked on the current June 30th balance sheet.

We will continue to analyze our tax positions quarterly and should this analysis result in a change of future estimated taxable income, the valuation allowance recorded against the remaining unrealized differed tax assets will be evaluated and, if released in part or in whole, will be expected to reduce the Company's effective tax rate to less than 40%.

The Company's balance sheet remains strong. As of June 30th, 2008 the Company had no borrowings on its $10.10 million line of credit with approximately $9.9 million of availability.

We are also looking into various alternatives to further improve the balance sheet in terms of refinancing the remaining $7.8 million in convertible debentures and would expect to have an arrangement in place before the debentures become due and payable in May of 2009.

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'm pleased with the results of our first quarter. I shall continue to execute on its strategic and operational plans to deliver record sales of $17.4 million as well as achieving $1.4 million in operating income.

We continue offering new products and services to the market and I'm delighted Iteris has achieved a record backlog of $28.5 million, an excellent leading indicator of future growth. Despite the weakness in the overall economy, our plans to accelerate our growth are providing tangible results.

As indicated before, we are increasing our sales and marketing efforts to further penetrate existing markets while tapping into new geographic regions. In addition, we have increased our R&D efforts to continue bringing new products to market.

Our VersiCam product, which was introduced at the beginning of the quarter, is being well received by the market. We expect to release several new and innovative products to market over the next few quarters.

We also have captured $11 million of new contracts that will present some important clients that will continue raise the visibility and awareness of Iteris. We envision improving our operating income as a percentage of sales going forward as our sales and marketing and R&D investments moderate.

We have also made progress in partnering with other companies as well as establishing and expanding new offices and our international distribution channels. I will expand on this point later in my comments.

Thanks to the progress we are making in the business and the profits generated over the recent quarters, we have also been able to significantly reduce our debt, which has improved our financial strength, giving us more flexibility. As Jim indicated earlier, we currently have no borrowings against our line of credit.

Now here are more detailed commentary on our performance. Revenues drawn from Transportation Systems services grew over 25% year-over-year. New in this quarter, we accelerated our investment in sales and marketing, capturing several major contracts helping us to further position Iteris as the leader in our marketplace. We signed $11 million of new contracts.

A record backlog of $28.5 million is 37% increase year-over-year. This level of increase in backlog provides us with stability and better visibility regarding our future performance, very important in light of the overall U.S. economic conditions.

We have also accelerated our hiring for new staff that will help us to meet the expected demand. During the first quarter, we have added 11 associates to the engineering and planning functions as well as sales and marketing. Specifically, we added several senior staff in the area of transit and traffic management to target key major contract opportunities.

The remaining of the associates joined to focus on contract execution and delivery. This is a significant achievement for us as having the right people in this space is a key enabler for revenue delivery.

In transportation systems, we have expanded our operations in two very important markets, Texas and New York, by hiring new staff and positioning Iteris to be a major player in these markets. Due to our expanded market reach and added sales and marketing, we expect to sign over $20 million of new contracts just within the first two quarters of this fiscal year.

Roadway sensors enjoyed another good quarter reaching $7.4 million. We saw solid demand primarily due to continued adoption of our video detection products and expansion of sales domestically and internationally.

Despite previously discussed sales weakness in the state of Texas, I'm pleased to report however that the recent increase in orders suggests that the sales recovery in Texas has already begun.

Earlier in this quarter we introduced our latest product to market, VersiCam, which is developed to focus on key under-served markets such a minor intersections and international market. This product has been well received. We began shipping in May and have already seen a significant interest from -- in users, which we expect to translate into orders over the next few quarters.

I'm very pleased to say that we have a strong pipeline of products and will be introducing more new products to market in the upcoming quarters. Specifically in mid-August, in about a few weeks, we will be introducing a new product during a national trade show, the Institute of Transportation Engineers in Anaheim, California.

This new product compliments and enhances the connectivity and ease of use of our existing offerings. By focusing on products that are first to market, we plan not only to build upon our leadership with new technology, but also continue to expand our margins.

In addition, with some of the operational changes we have made, we are now realizing production and engineering deficiencies. We continue to invest in international markets and recently forged an additional distribution channel agreement with a new distributor in China.

This new distributor will focus on the urban traffic control market. Any of you have visited China realize how big an issue traffic is becoming in that rapidly growing country. We continue to be optimistic about our leadership position as well as the opportunity we have to further expand the size of our [adversible] market.

Revenue drive from the sales of the vehicle sensors products reached $3 million despite the sluggish North American truck market. Importantly, vehicle sensors maintained profitability for the fifth quarter in a row.

Our passenger car distribution partner Valeo, a global tier one 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 systems to a total of 65 fleets with an estimated 49,000 trucks.

Sales remain as strong in Europe and Asia and a market full of active safety features such as LDW appears to be developing in these geographies as evidenced by the expanded order forecast we are receiving from the OEMs. The current market, however, in North America remains soft due to the impact of the overall trucking industry softness resulting in fewer truck purchases. However, we expect to gain strength in the second half of the year.

We are very pleased to learn that European community is advocating the use of active safety including LDW as a mandate in commercial vehicles. In U.S. earlier this month, Secretary of Transportation, Mary Peters, has specifically indicated active safety features including LDW will be a part of the modified approach to five star safety ratings. We expect to be the beneficiary of such a strong sentiments.

Our latest product safety direct which we introduced to market last quarter is being received very well and we are in tap with two major fleets. Safety Direct provides the operators and fleet managers real-time lane departure information alerting them of possible safety issues proactively. I'm also happy to say that we are 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. First, we continue to see a steady flow of requests for proposals as well as the number of bids we are submitting in transportation systems. As indicated before, we have increased our marketing efforts and in our view this is critical to ensuring that we build out a leadership position for the long run. This strategy has already been paying off with significant expanded backlog.

Second, we have been accelerating our introduction of new products to market and believe this is a key of strategy for accelerated growth. The first example of our focus on new product is VersiCam, introduced at the beginning of the quarter. As I said earlier, we will be introducing another major project to market in mid-August and expect an excellent reception in the marketplace.

Third, as I have mentioned in the past, our objective is for Iteris to achieve growth while maintaining profitability. That profit focus is the key element of our strategic plan, and we plan to maintain this focus.

Despite the fact that we increased our R&D in preparation of accelerated introduction of new products to market, increased ourselves in marketing investment during the first quarter, and the typical added [GNA] due to audit fees and stocks, achieved profitability of 8% as a percentage of sales. I expect that profitability at percentage of sales to improve going forward. At the same time, we plan to accelerate the revenue growth which is also a key matrix in our strategic plan.

Fourth, the continued focusing on improving our balance sheet, of working capital and achieving a good return on assets and investments. We are particularly pleased with operating cash flow improvements in recent quarters, including [it being our] line of credit. We expect to expand our line of credit and the overall credit facility to be prepared for the retirement of the remaining $7.8 million in debentures due in May of '09.

Finally, we plan to maintain our commitment to strategic plan and to expanding into new markets through OEM, channel partnerships, as well as presence in key markets and geographies. We are in discussion with several potential partners and expect that these relationships will help us solidify our leadership position in the market.

Going forward, I see a continued growth opportunity for the traffic management market, both domestically and internationally and Iteris will be direct beneficiary of it. I'm happy to say the second quarter is as starting as strong in all three revenue streams and we expect it to be another good quarter for Iteris.

In summary, again, I'm pleased with the results of the quarter, particularly with regard to the strong backlog and other line momentum, as well as accelerated introduction of new products to market. I believe we have many opportunities for increased growth and profit.

We will continue to work hard to keep improving the Company's financial performance and build shareholder's value. This concludes my remarks. We will be delighted to respond to questions and comments.

(OPERATING INSTRUCTIONS). Please stand by for your first question. Your first question comes from the line of Jeff Van Sinderen of B. Riley. Please proceed.

Hey, good afternoon and congratulations on your backlog. I wonder if you can talk a little bit more about what you're seeing in the international truck market and some of the opportunities that might be arising there.

Yes, thank you, Jeff. With regards to the international truck market, we have already seen the forecast, specifically the forecast that there are just three months or six months depending upon the OEM, more growth in the upcoming months and quarters.

I just came back from Europe a few weeks ago. I saw a strong sentiment in the way of demand. I visited in particular the Mercedes Benz truck assembly line. They are at capacity and are even discussing adding shifts and every six or seven truck has a lane departure warning in it at the moment. So I feel optimistic about the increased orders in the upcoming quarters from our OEMs, both the Europe and Asia.

Okay, good to hear. And then maybe -- and I don't know how much you want to talk about this, but maybe you can give us more color on what you're focusing on in terms of product line, the investments, projects you are working on there, anything specific you can talk about there?

What I could do is expand a little bit from the overall vision that we have. We like to continue introducing products that are focused in traffic management and safety and are in line with our strategic plan.

We have not only what's in the core area of traffic management and safety that we are looking at, but we are also looking at adjacent markets where we feel that strategically it is important for us to continue expand and penetrate into that market.

I believe that we are positioned very nicely to continue this introduction. I believe before the fiscal year is over we will have two, three, perhaps more products introduced to market.

We have accelerated the R&D for that reason and we feel good about it. It's very important not only that is they helps us to retain and maintain our leadership position in the market, but it helps us to also accelerate the margin.

As I indicated, in a few weeks here in sunny California we will be rolling out a major product, which really helps us in better connectivity and ease of use that a lot of end users have been anticipating and requesting. And I'm quite delighted that we are able to bring it with a timing -- in a timely manner to market.

So there's still even more potential upside in your product margin at this point then?

Absolutely. We always seek through expansion. As Jim indicated, the products started the house actually expanded 50 basis year-over-year and we continue seeking that expansion of market -- margin real values, opportunities and strategies.

Not only from a cost cutting approaches that we continue to do, but also providing the appropriate products to market in a timely fashion that we could forward until the competition possibly catching up, really setting the margin and enjoying that attractive pricing.

Okay, I just have one more question and then I'll let somebody else jump in. I think you said in the call -- in your comments that -- that you thought the North American truck market will start to strengthen in the second half, or at least your business would start to strengthen? I guess my question is what are you seeing there to give you the confidence that that business won't droop in the second half?

Yes, excellent question. Couple of data points. One, we have seen one of our main OEMs over here in U.S., they are projecting in the second half increase in orders.

Also, when we look at the various trade magazines, automotive magazines we saw recently a sentiment that was a survey from many of the CEOs of the truck fleets' owners envisioning that the second half they would begin purchasing trucks.

So we envision combination of the OEMs and the fleets would give us some general ideal that we would see improvement in the truck purchase which would translate the ordering LDW.

Okay, great. Thanks very much and good luck.

Thank you.

(OPERATING INSTRUCTIONS). Your next question comes from the line of Joe Giamichael of Rodman & Renshaw. Please proceed.

Thank you, and again, congratulations on the quarter. Just to touch upon the backlog of $28.5 million, can you remind us of the typical conversion time for that?

Yes, thank you for the question, Mr. Giamichael. What happens typically in the Transportation Systems you have an average of a six months duration. On the $2.7 million, which I believed you referred to on that particular contract, is this the one that recently announced or in general you're talking about?

Just in general.

Yes, in general. We could go anywhere from let's say three, four weeks to multi-year. Our sweetest spot is about six months. We have contracts when you get to a multi-million dollars that could go perhaps 12 months, sometimes 36 months.

This recent one that we announced a few weeks ago, it's a 30 month schedule, so it all depends specifically you get a team of maybe four, five, six consultants that would've spend most of their time on a particular contract. So that's the given rate of expenditure for a given contract.

Okay, that's fine. And it looks like you've added another 4,000 trucks in the lane departure side to the fleet that's adopted the technology. I know you talked just briefly about how some of the new truck bills should be accelerating and that.

Are there any other -- any other factors you can think of or anything happening on the passenger side of the Valeo that could possibly have an additional positive impact on the back half of the year?

Oh, absolutely. We have reasons to believe that that Valeo is developing the next generation of the lane departure warning and perhaps they bundle it with one or two features.

And we believe that that is quite attractive and would be well received in the marketplace. Also, the sentiments that we see in Europe and Asia is more adoption of the active safety, including lane departure warning.

The momentum in this sentiment, I believe, would help us significantly. Despite the fact that there are other competitors getting into market which I've said in the past is a double-edged sword.

In one hand, it is good that you see others coming into market validating this ecology, at the same time you know they dragged a bit of the piece of the share of the market from you. But the whole pie is getting a little bit bigger.

This wonderful sentiment that we hear from Europe, which again was confirmed again earlier this week, is that the European community is pushing for lane departure warning and braking active safety features. These two particular features, there is a lobbying movement going on that by 2013 would become mandates for the trucking industry. Of course this is all proposal, but it does have quite a bit of momentum.

We've seen similar activities in U.S., with different safety organizations, lobbying for that, and, as I mentioned in my comments, Secretary Peters is behind it quite a bit. And, in fact, has specifically included in her remarks when she had a conference call earlier this month.

And all of this would make us believe that we are getting momentum on this particular active safety feature. When you look at traditional features, seatbelt and airbags, it takes a bit of a time but once you get a bit of a momentum you could really accelerate that and I believe that we are headed in that direction.

Gosh, great, and just a couple of more questions. I'm sure you're well aware that the [Kihot] transaction that was announced yesterday regarding their intersection control segment. Is that something that you would have considered from an acquisition standpoint and are there other similar opportunities out there for you now?

That -- thank you for that question. Yes, we are aware of it. That specific transaction that included two components of Kihot's assets and namely peak and U.S. traffic, those two in particular would not have been of our interest. There may be other assets that Kihot owned that could be of our interest potentially. But those particular two were not, they would have been a significant overlap.

When you look at [peak] as an example, well we have our own video detection; we don't feel that we need that particular product to be added. But, we see from time-to-time this kinds of transactions and we wish we had purchasers and sellers that's of like in this particular transaction.

And then just one last question. You mentioned some of the lobby efforts that would potentially mandate some of these safety features and you've done a great job in terms of just sort of the blocking and tackling as the business evolves.

Are there any other wildcards out there, I guess along those lines that could be a real game changer for you so that it could accelerate growth much more quickly than sort of the organic process that you've shown?

Sure, sure. Am I -- should I assume that you're specifically talking about this lane departure warning or business in general?

Across the portfolio of the business.

Oh, wonderful. In the vehicle sensors, there are several activities going on and in my mind their stars are lining up. The underlying momentum of advocacy to make this particular feature mandate is a huge one.

In parallel with that, the insurance community is also looking at educating and offering opportunities to the buyers in the way of discounts in premium that we believe would be quite significant. And the third element would be really the adoption of the OEMs themselves, whether it is trucks or cars.

As you are aware, the U.S. American market is a bit soft, although U.S. -- although Europe and Asia is pretty strong. At some point, we believe that there is a convergence of a lot more adoption. If the Mercedes is putting one every six or seven, if there is a lot more interest, perhaps they would be putting it on every single truck.

Combination of these, I believe, is again changing movement for us. When we go to the roadway sensors, again there are interesting dynamics going on. We believe that international markets is a very attractive growth area for us.

Further penetration into U.S. market, particularly in the under served markets, I mentioned the VersiCam product that helps in smaller intersections. We are also looking at other adjacent markets that would be helping us for competitive reasons. I wouldn't want to expand upon it and just rely announcements as they come across.

In the transportation systems, we have already seen a nice growth year-over-year and they continue penetrating into new markets, which means going into new geographic areas, opening up new offices, if appropriate acquiring some firms.

So combination of these would make me very optimistic, Joe, about the future of our business and really moving the needle despite the conditions that we are experiencing from the overall economic situation in U.S.

Got it. Thank you very much. And again, congratulations on the quarter.

Thank you, sir.

(OPERATING INSTRUCTIONS). And there are no additional questions at this time. I will now turn the call over to our CEO, Abbas Mohaddes, for closing remarks. Please proceed.

Thank you, Operator. Ladies and gentlemen, again we appreciate everyone's support and look forward to updating you on our continued progress. Thank you, again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.