Iteris Inc (ITI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter Iteris Incorporated Earnings Conference Call. My name is Kenisha and I will be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr. Jim Miele, Chief Financial Officer. Please proceed, sir.

Thank you, Operator, and good afternoon. Welcome to the Iteris Third quarter 2009 Conference Call. I'm Jim Miele, the Chief Financial Officer of Iteris and I'm joined today by Abbas Mohaddes, the Company CEO. First, I'll recap the financial results of our fiscal 2009 third 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'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 discussed during the call are based upon information currently 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 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 10k and 10Q. 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 third quarter ended December 31, 2008, our net sales and contract revenues increased by approximately 7% to $16.5 million, compared to $15.4 million in the same quarter of the prior year. The increase in net sales and contract revenues was mainly a result of a 19.3% increase in transportation systems contract revenues to $7.4 million compared to $6.2 million in the prior year quarter. Also in the current quarter, vehicle sensors' net sales slightly increased to $2.8 million compared to $2.7 million in the prior year quarter while roadway sensor net sales slightly decreased to $6.3 million compared to $6.4 million. Abbas will provide more detail regarding net sales and contract revenues later in his comments.

Gross margins for the third quarter declined to 39.5% from 42.3% in the year-ago quarter, the decrease in gross margins was primarily a result of the overall product and sales mix in roadway sensors in terms of both customers and geography and partially due to an increase in contract revenues as a percentage of our total revenues, noting that contract revenue gross margins are lower than product gross margins.

The Company reported operating income of $1.2 million for the current quarter compared to operating income of $1.1 million in the prior year quarter. Current quarter operating expenses decreased by 1.9% to $5.3 million compared to $5.4 million and were down sequentially from $5.8 million reported in our second fiscal quarter. Net income for the third quarter was $741,000 or $0.02 per share compared to net income of $954,000 or $0.03 a share in the prior year quarter. In the prior year quarter, our net income was positively affected by tax benefits generated through the release of valuation allowance against certain of our deferred tax assets.

This resulted in $141,000 net tax benefit both in Q3, there is no such benefit in the current quarter and we expect to experience an effective tax rate of approximately 40% going forward. With that said, there are approximately [$68 million] of unrealized deferred tax assets in addition to the $8.6 million currently recorded on the Company's books. We analyze our tax positions quarterly and should this analysis result in a change in future estimated taxable income, the valuation allowance recorded against the remaining unrealized deferred tax assets will be evaluated and if released, in part or in whole, are expected to reduce the Company's effective tax rate to less than 40%.

The Company's financial position continues to get stronger each quarter. During the quarter, we entered into a $19.5 million credit facility with California Bank and Trust which consisted of a $12 million working capital line and a $7.5 million facility specifically designed for the repayment of our convertible debentures. We have already taken advantage of the $7.5 million facility and just recently retired an additional $1.5 million of the debentures for $0.98 on the $1.

To date, we have saved approximately 500,000 in principal as a result of this and other early retirements, and currently, there are only 750,000 in debentures remaining outstanding, which we expect to repay in May of this year. Additionally, as of December 31, 2008, the Company had no borrowing on its $12 million working capital line and approximately $6 million in cash. Now, I'd like to turn the call over to Abbas, who will discuss the quarter further and our strategy in greater detail. Abbas?

Thanks, Jim. I'm pleased with the results of our third quarter. Despite the current global economic conditions, Iteris continues to execute on its strategic and operational plans to deliver growth and profitability. We grew our revenue by 7% and operating income by 10% year-over-year. We have offered new products and services to the market and I'm delighted that our transportation systems revenue grew 19% year-over-year. And the backlog remains as strong at $34 million, which represent a year-over-year increase of 41%.

It is also gratifying to have a strong balance sheet which is the best it has been in an economy where there is so much bad news. The solid backlog in this economic environment is an excellent leading indicator of sustainable future growth. Our sales and marketing efforts have allowed us to further penetrate existing markets while tapping into new geographic regions. Our R&D effort to bring new products to market timely is paying off as well. Both our VersiCam and EdgeConnect products have been well received by the market.

We expect to release several new and innovative products to market over the next few quarters and expect to continue achieving favorable operating income going forward. Thanks to the progress we are making and the profit generated over the recent quarters, we have significantly reduced amounts due to our convertible debenture holders. We recently announced further retirement of $1.5 million of debentures, which brought our total remaining amount to $750,000, which we expect to retire in May.

We used the $7.5 million term note provided by our senior lender to retire the majority of these debentures and in doing so, we have reclassified a portion of the debt back to long term, which greatly improved our current ration to greater than 2 to 1. We currently have no borrowings against our $12 million working capital line of credit and have in excess of $6 million of cash on hand. This financial strength will allow us to continue executing our strategic plan.

Now here is a more detailed commentary on our performance. Revenues derived from transportation system services grew over 19% year-over-year, we continued capturing several contracts for a total of $6 million during the quarter while managing expenses to levels less than our second fiscal quarter. Our backlog of $34 million is a 41% increase year-over-year.

This level of increase in backlog provides with stability and better visibility regarding our future performance, which is very important to our business planning and outlook. I'm happy to report due to our expanded market reach and added sales and marketing, we have signed over $31 million of new contracts just within the first three quarters of this fiscal year.

Roadway sensors was relatively flat year-over-year reaching $6.3 million, orders in California and international markets have been lighter than expected. However, we are beginning to see a strong demand for our new products starting with VersiCam, which were developed to focus on key underserved markets such as minor intersections and the international market.

And also, our EdgeConnect product we introduced during our second quarter. EdgeConnect will enable system operators and traffic engineers to view vide detection on real time over Ethernet. The EdgeConnect's advanced MPEG4 and Edge.264 video compression ability minimizes bandwidth usage and is scalable to fit bandwidth availability. With several innovative products in the pipeline, we continue to be optimistic about our leadership position as well as the opportunity we have to further expand the size of our addressable market.

The revenues derived from the sales of vehicle sensor products was $2.8 million, up slightly year-over-year. Despite a sluggish North American truck market, we experienced 4% growth in North American truck sales. I am also happy to say that vehicle sensors have had seven consecutive profitable quarters. The current truck market in North America remains soft due to the impact of overall trucking industry sales. During this quarter, we also experienced softness in both European and Asian markets. Our latest product, Safety Direct, which was introduced during our second quarter had been very well received and initial test results with two major fleets are encouraging.

Safety Direct provides operators and fleet managers with real time lane departure information, offering -- alerting them rather, of possible safety issues proactively. I'm also happy to say that we are working on additional products and strategic partnerships to continue accelerating our growth in this business segment. As an example, our recent partnership with Delphi to exclusively distribute their radar based forward collision warning system for North American Commercial Vehicles is helping us differentiate and expand our offering.

I now would like to comment more broadly on operations and our business outlook. First, we see continued strong production [of request] for proposals from public agencies and we continue to submit [debt] for transportation systems projects to maintain and expand our backlog. And in our view, this is critical to ensuring that we build our leadership position for the long run. Despite a few soft pockets in the east, we have managed to keep the highest staff utilization through a balanced distribution of our backlog nationwide.

Second, we have been accelerating our introduction of new products to market and believe this is a key strategy for growth and diversification. We have already introduced several new products to market this year such as VersiCam and EdgeConnect. And we will be introducing additional products to market in the coming quarters and expect an excellent reception in the marketplace.

Third, our objective is for Iteris to continue to achieve growth and profitability. The profit focus is the key element of our strategic plan while we prudently allocate R&D and sales and marketing investments. This is very important in this difficult economic environment. At the same time, we plan to work very hard to grow our revenue, which is also a key metric in our strategic plan.

Fourth, we continue to focus on improving our balance sheet, our working capital and achieving a good return on assets and investments. We are particularly pleased with operating cash flow improvements in recent quarters, which have translated into a strong cash position in excess of $6 million. The recent expansion of our line of credit and the overall credit facility has allowed us to retire the majority of the $7.8 million in debentures, and we plan to retire the remaining $750,000 in May.

Finally, we plan to maintain our commitment to our strategic plan and to expand into new markets through channel partnerships as well as presence in key markets and geographies. We are in discussions with several potential partners and expect that these relationships will help us solidify our leadership position in our market. Going forward, notwithstanding any major budget shortfalls at the federal, state and local levels, I expect to see a continued growth opportunity for the traffic management market, both domestically and internationally, and Iteris will be a direct beneficiary of it.

It is comforting that key states such as California continue to focus on infrastructure improvements and the use of technology in transportation. For example, the measure [hour] in Los Angeles County, which passed last November will generate an estimated $40 billion for congestion relief projects over the next 30 years. Other states have passed similar measures totaling over $30 billion for transportation projects. We also believe that a stimulus package will provide us with added contracts and revenues as we provide both products and services for design, construction support, integration and operation of transportation infrastructure.

In summary, I am pleased that the results of the third quarter and the strong backlog and underlying momentum as well as an accelerated introduction of new products to market. I believe we have many opportunities to increase growth and profit. We will continue to work hard to keep improving the Company's financial performance and build shareholder value. This concludes my remarks; we will be delighted to respond to questions and comments at this time.

(Operator Instructions).

And your first question comes from Jeff Van Sinderen from B. Riley. Please proceed.

Good afternoon. Congratulations on building your backlog. It is great to see that. I wonder if you could talk a little bit more about potential budget constraints in California and some other regions where I guess there could be some deferral of work or deferral of releasing funds due to state and local issues and maybe how that compares to the opportunity to win new contracts filled by the federal infrastructure investment that is going on.

Thank you, Mr. Van Sinderen. Yes. I would like to respond to that in two sections. One, about a year ago, we consciously decided in anticipation of the market softness to invest in sales and marketing a little bit more and we focused on bidding on many request for proposals in an attempt to expand our backlog and we have been quite successful at that, as I have indicated in specific stats.

That kind of a backlog I expect to help us to weather the storm as we go forward. For example, this quarter that we are now in, we already have more than 95% of the backlog that we anticipate to burn in hand and that is quite comforting. As it relates to state budgets, of course, we are concerned about the California budget, but then we look at our specific contracts that we have now, very few would be impacted if this budget discussion continues to linger.

We have also experienced budget issues in other parts of the country. As an example, one of our clients in the East Coast ended up reducing contract that we have, again, what happens there is that we are able to deal with this in a couple of different ways. In one particular situation, we have to let go of a few individuals. At the same time, we reduced any further erosion of that situation by distributing backlog that we have company wide.

So while we stay quite vigilant about the budget issues, I would repeat the fact that our backlog, a very strong backlog, helps us to continue going forward. Now, I remain optimistic and perhaps bullish about the future opportunities as it relates to various measures that have been passed in different states as well as the contemplated recovery package.

We learned this morning, as an example, that over $30 billion in that package goes to highway and roadway activities. Well, we touch those types of activities in so many different ways. Every time there is a roadway construction, we may get engaged in a specific design activities, we may provide construction support, we may involve in congestion management and facility management activities and at the same time, be able to sell some of our products.

Many roadways link to intersections, you need to detect those, you need to upgrade those, you need to then time those. So we feel quite optimistic that when this package passes in the future quarters, we will be the direct beneficiary of it. I hope that responds to your question.

That is very helpful. Let me ask you, as far as the gross margin, what were the changes to mix and roadway sensor sales that impacted the quarter and should we expect that to kind of remain as it is or should we expect that to shift at all going forward?

Yes. Let me start by responding to that and then I'll ask Jim if he wishes to add any additional comments. The change in the margin was not due to any -- let us say reduction or pricing changes, anything like that. It was primarily due to the mix, in a state that we go direct, namely, California, Florida and New York, that we recently have added by the way as a direct, we have a higher margin -- this last quarter, those revenues at the percentage of sales of our products was less than the prior quarter.

So as a result of that mix, other states such as Texas and others that we experience a lesser of a margin, so this was overall, had an impact. Secondarily, in the transportation systems, we have a less of a margin than our product side, so we typically have, let's say, 30% to 35% or so margin in that. Although from the operating income, it still is quite strong because the R&D is a lot lighter in the consulting side.

But when the percent of the contract increases as a whole, it has an impact on the overall margin. Going forward, I don't foresee any material impact to my knowledge that should erode our margins going forward. In fact, with many of the innovative products that we are offering to market, oftentimes we have an opportunity to enjoy for some duration, higher margins just because those new products typically have an excellent reception and we could enjoy good margin going forward.

Okay, good. And then in terms of R&D and SG&A, how should we be thinking about those two items going forward? What do you think the trends are that we'll see over the next year or so?

Okay. Another wonderful question. During the first quarter of this fiscal year, we intentionally increased our sales and marketing and R&D and that was to capture some contracts and accelerated the product to market by design respectively. Starting Q2, we tried to narrow that down a little bit. Now, when you look at expenses, we wanted to take some aggressive actions in Q3 to just make sure that we respond to our strategic plan and deliver appropriate profitability.

So when you look at Q3, sequentially, we reduced it by about $400,000 - $500,000 as far as expenses, this was $5.3 million versus $5.8 million in Q2. And year-over-year, we slightly have reduced the overall expenses again, $5.3 million versus $5.4 million.

However, going forward, we believe that it is important for us particularly in tough economic times, for us to focus on prudent R&D and sales and marketing. So I would anticipate that the level of expenditure in Q3 continue in Q4. As far as the next year is concerned, at the moment, Jeff, we are in the process of putting together an finalizing our next fiscal year plan, and I'll be presenting that to our Board of Directors next week.

At that time, we would have some specific feedback as to what would be the overall expenses, particularly R&D and sales and marketing for the next year. But generally, I would, at the risk of repeating -- would like to mention that both R&D and sales and marketing are extremely important to us and we are not going to jeopardize the prudent expenditure and investment in those areas.

Got it. Okay, I'll let somebody else jump in. Thanks very much.

Thank you, sir.

And your next question comes from the line of Joe Giamichael from Rodman and Renshaw. Please proceed.

Good afternoon, gentlemen, congratulations on the quarter.

Good afternoon. Thank you, Mr. Giamichael.

So you talked about mixed shift a little bit and the impact that created on consolidated results, can you just, I guess, more globally, remind us of the gross margin characteristics between the different business units? And let me ask you, you speak very generally about this, just sort of how they compare.

Yes. I'll let Jim address that.

Generally, our transportation systems consulting revenues, they'll range anywhere from 30% to 35% and from time to time, when we have a mix of contracts that have a higher subconsulting content, that can have an impact of pulling down the margin maybe into the low 30s. So generally, what we said all along, what tends to be true is that the margins for our consulting business are 30% to 35%, we generally typically see those in the mid 30s is a typical range for those.

We strive to work on consulting contracts that have higher margins as one of the things that we work very hard at achieving. In our product margins, they are typically in the high 40% range. And we can have an issue where we've got a mix that Abbas described earlier where we are selling direct in certain geographic regions like California and Florida where we get a much higher margin on the products we sell. When we go through distribution in the majority of the country, we get a lower margin, we are selling at a lower price point because we are outsourcing some warranty installation and other responsibilities to the dealer.

Okay, thanks, Jim. And just -- I guess just a dropdown in the income statement -- could you just go through sort of the same exercise on an operating income basis for your (inaudible) groups?

Well, operating income on our consulting business, what we have generally said and what tends to be true is it is approximately 10% operating income. In the product businesses, the vehicle sensor business turned profitable a year ago, and has remained profitable so the margins are less than that at this point in time, but increasing as they move forward and grow sales and increase their margins and smartly reduce expenses.

In the roadway sensor business, the margins have been in the mid to high teens, depending on our investments in R&D and right now, they are pretty strong, we haven't issued the segment data yet, but we will issue the segment data with the 10Q and you will see margins in the teens for the roadway sensor business.

Okay. And that is including the additional R&D that you guys have been spending this year, right?

Yes. That includes the additional R&D.

Okay. And then just more generally, have you began to see -- I mean you wouldn't see a (inaudible), but just do you see interest pick up as people start to consider how any of the infrastructure money or infrastructure plan will be implemented?

Certainly. We talk to a lot of our clients and customers on a daily basis and these last few weeks, we have noticed an interest and excitement about the possibilities of specific projects. In fact, the last few months, we have assisted several agencies in identification and putting together the so called shovel ready projects that they have submitted to the transition team and so on. And there is a very high anticipation and expectation of the timing of those going through, so yes. There is certainly a more positive mood at the moment out there.

Sure. Okay. Great. And then just last question, and I'll get out of the way. As you continue to see sort of weakness in the truck market and I guess, has that started to create a further divergence between your product lines sort of in the sense that the R&D is a pretty significant commitment in the product market, I would imagine right now is a fairly difficult one. Do you continue to see the synergy opportunities between all of the operating units?

Absolutely. And in fact, that's what was I was indicating earlier that we started a process several months ago -- a couple of quarters ago, even more aggressive expense control activities, which a lot of it had to do with consolidation of activities and leveraging different groups and units and to continue doing that.

I would like to make a comment on the truck market. Despite what we see in the global negative impact on the sales of trucks, as you may be aware, we have the EPA requiring the fleets to purchase the new standard of engines by 2010, so the time is really running out of many of these fleets with old trucks. So many, including us, speculate that in the second half of this calendar year, we should really see a significant take off on the truck purchase, which of course, that would help us quite a bit.

In the meantime, what has happened is that the software package that we introduced to market during the second quarter called SafetyDirect is really helping us to penetrate into the market a little bit more because many of the fleet managers would love to know and have the information of the driver behavior characteristics and you could now, via SafetyDirect, collect that information and provide it to the fleet manager.

So we are seeing yet a new wave of interest in our lane departure warning through the software that we have introduced. So I remain optimistic about the prospect of that business segment going forward despite the sluggish economy that we are experiencing at the moment.

Got it. Well, thank you very much for answering the questions and congratulations on growing your business in a very difficult environment.

Thank you, sir.

(Operator Instructions).

And your next question comes from the line of [Mike Sloan] from [Harvey Partners]. Please proceed.

Hi, guys, thanks for taking my question.

Please.

I just was hoping you could give us a little bit of color on how you're trying to quantify the impact of the stimulus package?

Excellent question. First of all, we look at the specific projects that are envisioned. Of course, this is a moving target as you know being discussed. This morning, we saw the latest table that they allocated $30 billion for roadway improvements, about $2.8 billion of that, as an example, for California. So we take a look at the specific projects, some of those projects, we already have performed the design so they are ready to go for construction.

So we get involved in the construction support phase of that, I'll just give you an example. Let's say Main Street in Houston is going to be upgraded for [80] miles, but that goes through 20 intersections, every intersection that gets upgraded, they need new detection, so we would provide our product in that. After it is complete, they may need signal timing to optimize and synchronize that corridor, we will provide support on that.

That is just an example of the type of project that we would be engaged. So we want to be careful and not be too aggressive about that. What we have currently as far as the backlog that we have is quite strong and is going to carry us for several upcoming quarters. You know, our burn rate annually is, let's say, about $30 million or so, we already have far in excess of that in backlog.

But we feel that when the recovery package comes to play, the stimulus package and some of those projects, by the way, we saw today the agreement is that between 90 to 180 days, they want to have those in contract. So this is a fast moving thing. We believe that we could continue to grow, in other words, we would be adding staff, we would be responding to those and need to burn those and generate revenue and so that is kind of how we characterize it.

Okay, I appreciate it. I guess, I mean, for projects where you have already done the design, I mean is there a rule of thumb if you booked x amount of revenue on the design and the package comes out to Y amount of revenue when it is actually implemented?

It is hard to predict but I give you this general rule of thumb. Typically, the design is somewhere between, let's say, 10% to 20% of the overall construction budget and depending upon how much we were involved in the design, either the prime or a sub, so we will have a good component of that.

So let us say 80% to 90% of the remaining budget is actual construction. So by far, the majority of the fund is in construction, which we believe the majority of the stimulus package would end up being. Now there is always a component of that construction that requires support and that support could be everything from the communication support and this is communication design, putting in fiber, putting in various means of communication, hard wire or wires or what have you, as supporting during construction, support, you typically have a lot of change orders.

So typically, the support during construction could be just as much as the design magnitude, if that is helpful. In addition, these projects would go to bet, so even if you have not performed the design, they could still bet and work with others, in fact, we are establishing a strategic partnership with a variety of firms that we could go after some of the even much larger types of projects so that we could benefit from them.

So it would be typically significant, particularly realizing that such a significant magnitude would be spent during such a short time. Again, we have received indication as you might have received reading papers and watching the news that about 50% of these funds for highway use is going to be spent within the first 18 months. Now I mentioned that 90 to 180 days to get into contract, but that means there is also expeditious implementation phase, that is also a good news. So this is not like a ten year program of activities, so we expect that we would see the benefits of that in a short period of time.

Sounds good. Thank you.

You're welcome.

(Operator Instructions)

At this time, there are no questions in queue.

Ladies and gentlemen, again, we appreciate everyone's support and look forward to updating you on our continued progress. Have a wonderful afternoon.

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