Iteris Inc (ITI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Iteris Incorporated Earnings Conference Call. My name is Kenetia and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer sessions towards the end of today's call.

(Operator Instructions)

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

Thank you, operator. Good afternoon, and welcome to the Iteris Fourth 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 President and CEO. First, I will recap the financial results of our fiscal 2009 fourth 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 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 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 forward-looking statements.

For the fourth quarter ended March 31, 2009, our net sales and contract revenues decreased approximately by 4% to $16.4 million, compared to $17.1 million in the same quarter of the prior year. Our transportation systems contract revenues increased 24.3% to $8.6 million compared to $7 million in the prior year quarter, which was offset by an 18% decrease in Roadway Sensors net sales to $5.9 million compared to $7.2 million in the prior year quarter, and a 36% decrease in Vehicle Sensors net sales to $1.9 million, compared to $2.9 million in the prior year quarter.

Abbas will provide more details regarding net sales and contract revenues later in his comments. Gross margins for the fourth quarter declined to 35.3% from 43.6% in the prior year quarter. The decrease in gross margins was primarily a result of a larger percentage of total net sales and contract revenues derived from our contract revenues, which provide lower gross margins. Additionally, our fourth quarter contract revenues also included a higher sub-consultanting content, which also impacts our gross margins.

The Company reported operating income of $1.1 million for the current quarter, compared to operating income of $2.3 million in the prior year quarter. Current quarter operating expenses decreased by approximately 8% to $4.7 million, compared to $5.2 million reported in the year ago quarter and were down sequentially from $5.3 million reported in our December 31, 2008 quarter. The decrease in SG&A expense was a result of our efforts to maximize efficiencies through operational excellence initiatives that included prudent cost-cutting measures and organizational consolidations.

Net income for the fourth quarter was $8 million or $0.23 per fully diluted share, compared to net income of $7.9 million or $0.23 per fully diluted share in the prior year quarter. In both the current and prior year quarters, our net income was positively affected by tax benefits generated through the release of valuation allowances against certain of our deferred tax assets. These valuations were released due to the Company's expectations it will generate enough future taxable income to be able to utilize these tax assets.

This resulted in a $7 million net tax benefit recorded in the current quarter and a $5.7 million benefit recorded in the prior year quarter. The Company has now fully realized all its tax benefits, and as a result has recorded a $15.7 million deferred tax asset on its March 31, 2009 balance sheet, which can be utilized to offset future taxes payable.

We analyze our tax positions quarterly and should this analysis result in a significant change in future estimated taxable income, we may record a new valuation allowance against any remaining unrealized deferred tax assets in part or in whole.

The Company's financial position is strong. We ended the quarter with $6.4 million in cash and continue to generate positive cash from operations on a quarterly and annual basis. On May 18, 2009 the Company retired the remaining 750,000 in convertible debentures outstanding using a $7.5 million credit facility provided by our senior lenders, specifically designed for this purpose. Additionally, we have not borrowed against our $12 million working capital line of credit and the entire amount is available to us.

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. This was not the easiest quarter for us, but considering the economic conditions all of us face, I'm pleased that we were able to maintain our profitability despite the drop in product revenues.

Due to the slow economy, with which everyone is familiar, we saw a slowdown in sales of our products, and this impacted our overall revenue as well as profitability when compared to the prior quarter. Conversely, we saw strength in our systems revenues, which grew 24% year-over-year. Our systems backlog grew to $34.5 million, a 40% increase year-over-year.

All of our leading indicators, including our R&D pipeline, deal activity, and most importantly our growing backlog, provide us with significant optimism about the health of our long-term business prospects. We are increasingly confident and believe that our investment in sales and marketing over the last year is benefiting the Company, and our global presence along with the breadth and depth of our offerings will continue to provide us with opportunities for top line growth and increasing profitability. During the quarter, we introduced new products to the market and we completed an important acquisition, which will further finance our competitive position.

We are pleased with our success in research and development during the fourth quarter. Our ability to provide attractive and new products to market is a hallmark of Iteris, and in the coming weeks we will be announcing additional new and innovative products that continue to effectively leverage our strong sales channels to our customer base.

We continue to receive positive feedback from our customers, and new product orders validate our strategy. Because of our strong R&D pipeline and our reputation as a market leader, I believe we are well positioned to resume our growth as the economy begins to stabilize.

Thanks to the profit generated over the recent quarters, we have been able to solidify our balance sheet. We currently have no borrowings against our line of credit and have in excess of $6.8 million cash on hand. Our long-term debt is structured for five years with terms favorable to Iteris. I believe this financial strength will allow us to continue executing our strategic plan, and will help to further set us apart from competition.

In addition, our strong balance sheet gives us a powerful tool to use with M&A opportunities. I'm now going to go into detailed commentary on our performance, then discuss how we are working to improve specific areas of our business, then conclude with thoughts on our industry and the associative macro trends.

Revenues derived from Transportation System services grew over 24% year-over-year. We captured several contracts, which in aggregate were worth over $9 million during the quarter. As I mentioned, our backlog of $34.5 million is a 40% increase year-over-year. This increase in backlog provides us with stability, which is important to our business planning effort. I will have to mention that due to our expanded market reach and the investments in sales and marketing, we have signed over $40 million of new contracts during the fiscal year.

Roadway Sensors product sales reached $5.9 million, which is an 18% decrease year-over-year, primarily due to the economic conditions and associated slowdown in intersection construction and upgrades. Orders were lighter than expected in California, several other states and international markets, particularly during the first couple of months of the quarter.

However, we are beginning to see a strong demand for our new products starting with VersiCam, which was developed to focus on key underserved markets such as minor intersections, and also the EdgeConnect product, we introduced during our second quarter. EdgeConnect enables system operators and traffic engineers to access their vantage systems and view with streaming video in real time over Ethernet. We also completed the acquisition of the assets of Hamilton Signal, including their leading product Abacus.

This important acquisition affords us the opportunity to provide our customers with traffic and incidence detection data from the installed base of surveillance cameras without any additional field installation. We view this as an ideal addition to our product portfolio, and this reinforces our position as the leader in the industry.

Our ability to sell more products to the same customers through our existing sales and marketing personnel and channels, without adding additional resources, will more effectively leverage our infrastructure and improve our operating margins as we move forward. With several innovative products in the pipeline, we continue to be optimistic about our leadership position, and believe we have the opportunity to further expand the size of our addressable markets.

Revenues derived from the sales of Vehicle Sensor products reached were $1.9 million, a decrease of 36% year-over-year. In addition to the sluggish North American truck market, we experienced order reductions from our European and Japanese OEMs. The current truck market remains soft globally, although we have recently seen an uptick in forecasts from a few of our OEM customers that we expect will result in an increase in orders from these customers.

Our latest software-based product Safety Direct, which we introduced to market during our second quarter is being very well received, and the test results with two major fleets are encouraging. Safety Direct provides the operators and fleet managers with real-time lane departure information, proactively alerting them of possible safety issues and providing them with a powerful tool to lower operating costs or enhancing fleet safety.

We are working on additional products and strategic partnerships, which we believe will help to resume our growth. We recently formed a strategic partnership with PeopleNet to integrate Safety Direct into their onboard and mobile communications systems. An important point to note is that the European community is planning to have a few active safety features mandatory by the year 2013 for their large trucks, including lane departure warning. This is important as we expect to be a direct beneficiary.

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 bids for transportation systems projects to maintain and expand our backlog. In our view, this is critical to ensuring that we build our leadership position for the long run.

We have also started to see a specific contracts going to bid relative to the stimulus package. Case in point, next week we will be submitting a proposal to the state of Maryland for the traveling information system for about $5 million. Another example is three recent contracts awarded to us in the state of Utah for about 500 million -- $500,000 in total -- gee, it would have been nice if it was 500 million. Currently, we are tracking around a dozen projects funded by the federal stimulus package, and we expect to submit proposals and bids for most if not all of these projects.

Second, we have continued investing in R&D to enable us to introduce new products to market, and believe this is a clear strategy for accelerated growth and diversification. We have already introduced several new products to market during the last fiscal year such as VersiCam and EdgeConnect. We will be introducing additional products to market in the coming quarters and expect an excellent reception in the marketplace. Iteris expects to reinforce our position as the leading traffic management company in the industry with a wide range of products and services and state-of-the-art technology.

Traffic is a problem that increasingly challenges city planners and elected officials. New roadway construction is expensive and our solutions oftentimes can help municipalities reduce both congestion and pollution. Third, despite the sluggish economy, our objective is for Iteris to resume growth and maintain consistent profitability. Our focus on profit is a key element of our strategic plan. Also we will maintain both prudent R&D and sales and marketing investments.

This is very important in this difficult economic environment. While other companies are forced to scale back, our profitability and a strong balance sheet enables us to make strategic investments to reinforce our competitive advantage. 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, as part of our strategic plan we began an initiative called Operational Excellence over a year ago, and have focused on cost-cutting improvements in operational efficiencies and prudent organizational refinements. This has been a successful initiative. We recently further solidified all of our sensors products into a single group. Going forward, I expect to achieve better efficiency in both G&A as well as sales and marketing for this consolidated group.

Fifth, we will continue to improve our balance sheet, expand our working capital, and achieve a solid return on assets and investments. We are particularly pleased with operating cash flow improvements year-over-year and by being out of our line of credit, with an excess of $6.8 million cash on hand. The recent expansion of our line of credit and overall credit facility has allowed us to retire our $7.8 million in debentures last week with a single debt structure and favorable terms going forward.

And finally, we plan to maintain our commitment to our strategic plan and to expand into new markets through OEMs, channel partnerships, presence in key markets and geographies, and appropriate strategic and synergistic acquisitions. Examples of these include European truck market OEMs and key suppliers that we can team up for our current and new invasive sensor products and key distribution channels in Europe and Middle East for our Roadway and Intersection sensors products.

For competitive reasons, I won't expand on the acquisition opportunities at this time. I continue my optimism about the markets we are in and its health going forward. Despite the current economic conditions, I expect expanded federal and state funds to be available for transportation infrastructure. A couple of examples include the infusion of a stimulus package, the upcoming highway bill, which is anticipated to be between $450 billion to $500 billion. This is twice as much as the previous bill.

Finally, we are excited by the recent $1.5 billion grant announced by the Secretary of Transportation, Ray LaHood, called TIGER, which is specifically designed for the application of technology in transportation, which we will be a direct beneficiary. I expect to see a continued growth opportunity for the traffic management market both domestically and internationally. I believe Iteris will be a direct beneficiary of it with added contracts on revenues, as we provide both products and services for design, construction and support, integration and operational transportation infrastructure.

In summary, despite the tough economic conditions, I am pleased with our ability to continue to generate profits. I'm also encouraged by our strong backlog and underlying momentum, as well as an accelerated introduction of new products to market.

We are fortunate to have the ability to make prudent investment in both R&D and sales and marketing to position us for rapid growth in the future despite the current lighter than expected revenues. As bullish as we are about the long-term drivers for infrastructure and specifically transportation technology and traffic management, we believe the economic conditions we face during this quarter will continue to impact our business in the first quarter at about the same level we experienced in Q4.

While we are not providing guidance, due to the reduced visibility this recession causes, rest assured, 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 the line of Jeff Van Sinderen from B. Riley & Company. Please proceed.

Hi guys, this is Nick Genova filling in for Jeff. A couple of questions, first on -- within the vantage marketplace for intersection control, can you give us a sense for how you guys are feeling the effects of municipal budget constraints, and how you expect that to evolve over the next couple of quarters?

Yes, thanks to the question. What we have seen so far in many of the states is that the contracts really haven't gone away but rather they are being delayed a little bit, sometimes due to contractors' cash issues, sometimes due to the public agency preserving the funds, but it hasn't been significantly slowed down in comparison let's say with what we hear from the state budgets. You have got to realize that the municipalities have several sources of revenues; they have got their capital improvement, they've got their maintenance, they have other measures that come in.

The maintenance budget we haven't really seen impacted much at all. It is the capital improvement, new intersections and so on that we have felt the impact. I would expect that within the next couple of quarters they would start going up, because we're beginning to see the infusion of the stimulus funds. In some of the states, we're beginning to see the infusion of some of the bond measures that they have passed, and so I feel overall optimistic within a quarter or two this turning around.

Okay. And then on the transportation systems, specifically regarding the backlog, which seems like it increased pretty nicely, can you give some color on how that backlog is relative to your plan for the year, and maybe compare that to last year? I'm basically trying to get a sense for how solid your visibility is looking into fiscal year 2010 versus what it was at this time last year.

Yes, sir. Very good question. A year ago this time, we had about perhaps 65% of the backlog already signed contracts as we have started the year. Now you realize that the backlog it is not all for one year, sometimes it goes beyond a year, two or three years at times. This year, we are starting the year -- when we had started at the beginning of April, we already had 75% approximately of our expected revenue for the year in signed contracts. So year-over-year, we have a much stronger signed contract allocated to the year than the year before.

That is helpful. And then kind of my final couple of questions here, just -- I know you guys don't give specific guidance, but looking ahead you have got various things going on, it sounds like you have a decent visibility in the system's backlog, and then you have various acquisitions you're looking at. How should we look at revenues directionally for the year? I mean are we looking pretty stable year-over-year decline, slight increase, can you give us any color on that?

What I could tell you from the visibility that we have, you are correct. In the systems group, we have a much better visibility. I feel that we should be consistent. I don't see any impediment or major issues that suggest any slowdown in that revenue at all. On the Vehicle Sensors, we experienced a slowdown last quarter; this quarter is about the same or maybe even less.

The positive part in that area is that we received from few of our customers better forecast than what we are receiving in orders at the moment for future quarters -- yet to be seen when it turns into orders. The Roadway Sensors products, it seems to me that this quarter that we're in, quarter one, is probably flat sequentially and I would envision that getting into the summer quarter, we should do a little bit better. So, that is all I feel at the moment.

On the expense front with the various investments your guys are making in the business both within SG&A and R&D, should that -- is that going to be more than offset by continued cost cuts and efficiencies, or should we look at increasing expenses year-over-year?

At the moment, we're trying to be very careful. Of course, we want to be prudent when it comes to R&D and sales and marketing. In other areas, I would envision that we would continue experiencing some cost-cutting measures and efficiencies, but we're not at the moment really planning to reduce any of the R&D or sales and marketing.

Okay, thanks.

I appreciate that.

(Operator Instructions)

And your next question comes from the line of Frank Magdlen from The Robins Group. Please proceed.

Good afternoon, Abbas.

Good afternoon, Mr. Magdlen.

I will ask a question differently -- on the backlog that you have, how much of that backlog do you expect to earn or shift in the next 12 months?

Roughly about 75% of that backlog. Now it is considerable, Mr. Magdlen, that during the year, we would be receiving new contracts, some of which would be also spent during this fiscal year, you will realize that. But from the -- what we have signed backlog, 75% of it approximately is attributed to this fiscal year.

Okay, that is good to hear. In the -- what is your headcount now? I guess is the other way I will ask it. Where are you in headcount?

As of last Friday, we were at 243 associates.

And can you break out what they were for services?

Sure. We have -- in the Transportation Systems group, we have about 140 associates. In the Sensors group we have about 60 or so and the rest are corporate.

Okay.

That includes accounting and IT and so on.

All right. And then, with the balance -- looking at this year, the impact in the short run would be primarily municipal funding as opposed to federal?

I think that is a fair assessment, Mr. Magdlen, in particular when it relates to the sensor products going to traffic management. Another impact -- although the Vehicle Sensors products are less than 15% of our overall revenue, but that is also impacted and this is, of course, the OEMs and then the aftermarket fleets primarily. But, you are correct. The majority of the impact would come in traffic management municipalities in the way of Roadway Sensors.

Okay. And then, obviously there are new emission standards coming in play in 2010, and I realized that the economy is very weak. Are you seeing any uptick or indication from your OEM partners that they expect any type of an uptick?

Yes, we haven't seen it, but we have indications in the way of projections of higher orders coming up, although we have seen a few quarters that some of those projections have moved to the right. But there seems to be consensus, Mr. Magdlen, that the trucking industry is coming back in the way of the sales for the trucks before the end of the year, some of which, as we indicated year 2010 EPA standards really require. So, based on that speculation we anticipate by the third and fourth quarter seeing increased orders in that area.

Okay. Just two other questions, one has to do with the passenger car lane departure warning, are you seeing any interest there or any increased interest?

Absolutely. In the short run, of course, right now the production is low, but when I was in Germany three weeks ago discussing with our partner, Valeo, they are very much optimistic about expansion in the current platforms that they have with Nissan and they are working on proposing with other OEMs -- car OEMs in Europe. So, I came away feeling that there is definitely an uptick in here, despite a quarter or two or so of sluggish economy.

The other comment that I should make at this point amplifying what I indicated in my prepared remarks is that the European community is going for the mandatory key safety features, two or three safety features for the large trucks and that specifically includes lane departure warning. And we are quite pleased about that and have begun key strategic maneuvering to make sure that we would be a direct beneficiary of that significant potential uptick in sales.

Okay. And, Jim, going forward, what would be a good tax rate to use for our modeling purposes?

Well, going forward the Company will be reporting a 40% effective tax rate in terms of expenditure on the P&L, but keep in mind the next $16 million -- I mean, sort of simplifying things, the next $16 million of tax payable will be offset by the asset on the balance sheet, but the P&L will reflect a 40% effective tax rate.

Okay, thanks a lot.

Thank you, sir.

(Operator Instructions)

At this time there are no questions in queue. I would turn the call over to Mr. Abbas for closing remarks.

Thank you very much, Kenetia. I appreciate it. Ladies and gentlemen, again we appreciate everyone's support, and look forward to updating you on our continued progress.

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