Iteris Inc (ITI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Iteris, Incorporated Earnings Conference Call. My name is Wayne, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session toward the end of this call.

(Operator Instructions)

I would now like to turn this presentation over your host for today's call, Mr. Jim Miele, Chief Financial Officer. Please proceed, sir.

Thank you, Wayne. Good afternoon, and welcome to the Iteris first quarter 2010 conference call. I am Jim Miele, the Chief Financial Officer of Iteris, and I am joined today by Abbas Mohaddes, the Company's President and CEO. First, I will recap the financial results of the fiscal first quarter, and then Abbas will provide further commentary about our business and 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 discussed 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 forms 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 first quarter ended June 30, 2009, our net sales and contract revenues decreased by approximately 16% to $14.6 million, compared to $17.4 million in the same quarter of the prior year. Our Transportation Systems contract revenues increased 11.4% to $7.7 million, which was offset by a 20.9% decrease in Roadway Sensors net sales to $5.9 million, and a 65.9% decrease in Vehicle Sensors net sales to $1 million. As there are different characteristics affecting each of our revenue streams, Abbas will provide more detail regarding net sales and contract revenues later in his comments.

Gross margins for the first quarter declined to 38.1% from 44.4% in the prior year quarter, but increased from 35.3% reported in our previous quarter. Similar to the previous quarter, the decrease in gross margins was primarily a result of the larger percentage of total net sales and contract revenues derived from our systems contract revenues, but provides lower gross margins than product sales. Additionally, our first quarter contract revenues included a higher sub-consulting content than the prior year quarter, which adversely impacts the gross margin.

The Company reported operating income of $321,000 for the current quarter, compared to operating income of $1.4 million in the prior year quarter. Current quarter operating expenses decreased by approximately 18% to $5.3 million, compared to $6.4 million reported in the year ago period, primarily as a result of our continued efforts to maximize efficiencies through operational excellence initiatives that included prudent cost cutting measures and the reduction of certain general and administrative expenses.

Net income for the first quarter was $144,000, or $0.00 per fully diluted share, compared to net income of $666,000, or $0.02 per fully diluted share in the prior year quarter. We again ended the quarter with slightly more than $6 million cash, and managed to generate positive cash from our operations this quarter. We plan to aggressively focus on cash collections and inventory management in an effort to further improve our cash position, and the overall financial strength of the Company. We have yet to experience abnormal delinquencies in our receivable accounts, and our cash collection efforts to-date have been largely successful.

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. During the last conference call, we discussed some of the short-term challenges we were facing, and indicated that the challenges of the fourth quarter would continue into the first. Jim discussed the financial results, and I will touch on some of the specific business challenges we are experiencing, but I am also going to focus on the future. I will discuss what we are seeing thus far in the second quarter, as well as the initiatives we have put in place during the last year, and how they are expected to positively impact Iteris.

We were able to maintain our profitability despite the decline in revenue, and our expectation is that our profits will increase in the coming quarters. Additionally, we expanded our gross profit margin compared sequentially to the fourth quarter, through geographic and product mix and, in part, higher margins on new products. It is clear we have built a lean, efficient organization and a strong competitive position, which coupled with our improved balance sheet should be able to use this economic downturn as an opportunity to become a stronger company.

We have adjusted to the current economic dynamics over the last 12 months as part of an operational excellence initiative, and have restructured our product development and operations. Company-wide, we have reduced our overall G&A by approximately 18% year-over-year. We plan to remain focused on profitable growth; it is our number one mission as we weather what we hope is the tail end of very turbulent market conditions.

End of last year, we have added several staff to expand our sales and marketing efforts and presence in the marketplace, and more firmly establish Iteris as a leader in traffic management. We are now in several new markets, both domestically and internationally. In addition, we have invested in research and development and plan to continue to challenge our team to increase the rate of innovation to provide us with more products, technologies and services to sell through our global distribution network.

The goal is to sell more products to our customer base, which should provide us with increased operational leverage and enabling us to increase the long-term earnings power of the Company. Much of this effort is already showing signs of success that we believe will be more evident in quarters to come. The economic slowdown may affect new truck sales, but we believe that there may be a corresponding opportunity.

Current trucks on the road will continue to age and ware down, and expect to create a pent-up demand for new vehicles in not too distant future. Also, because we are (inaudible) and on many of the new trucks, we believe Iteris stands to benefit when the orders start to flow at normalized levels.

Similarly, and in spite of the stimulus, many municipalities are facing budgetary crises and have to put off all but the most essential expenditures, and spending for new roadways and systems to address congestion is, in some cases, being delayed. These needed projects and construction won't just go away, and should eventually get started and completed. This is why we believe our pipeline of projects remains intact and robust.

Some projects are shifting into the future, and we firmly believe we benefit from efforts to track, market and bid in the coming quarters as opportunities become available. Our current backlog for Transportation Systems projects is approximately $30 million, and during the first quarter, we have received notice of awards of approximately $10.4 million, some of which has already translated into backlog and the remaining is still in contract negotiations.

I should also mention that we are beginning to see the impact of the stimulus funds directly. During Q1, we received over $800,000 of product and services from four different contracts. We are currently preparing proposals on five separate contracts worth over $8 million in Maryland, Michigan, and California. All of these have been, or are being, driven by stimulus funds targeted to quickly create jobs, while improving the infrastructure and the environment which is our sweet spot.

Over the last 12 months we have introduced several new products which contributed to 20% of our revenue in Roadway Sensors products during the first fiscal quarter. These new Roadway Sensors products include VersiCam, EdgeConnect, RZ-4 Advanced. And, in fact, we expect products introduced in the last 12 months to contribute approximately 30% of our revenue in the second fiscal quarter for Roadway Sensors products.

Just last month we introduced two new products, VersiCam Wireless and the VantageView software. This rate of product development and innovation is unprecedented in our industry, and it stems from our strategic vision for growth, understanding of the needs of the market and, we believe, positions Iteris to expand its market share and for significant growth going forward.

Also, we have updated the recently acquired Abacus product line in order to position this product for more rapid market adaption. Focus sales and marketing activities are underway, and initial orders were shipped in Q1. We believe this product is well positioned for growth in both our domestic and international markets.

We also plan to continue to innovate invasive sensors and safety products, as our goal is to further differentiate from competitors and increase our technological advantage. It is important to note that the European community is mandating key active safety devices including Lane Departure Warning by the year 2013 for commercial trucks. We are preparing for high volume demand and are in partnership discussions with key companies.

Another area of focus for a strategic partnership has been relative to our Safety Direct software. This software is receiving significant positive reaction from the market, and we are partnering with companies such PeopleNet to expand our distribution capabilities. Safety Direct provides the operators and fleet managers with real time lane departure information proactively, alerting them of possible safety issues. We plan to focus on further development and introduction of new products during the next two quarters, and we will discuss those with our shareholders at that time.

In the vehicle sensors products, we are already seeing improvement in sales for the second fiscal quarter. As an example, approximately one month into our second fiscal quarter, our shippable backlog already exceeds product sales for the entire first quarter.

In Transportation Systems we continue to see healthy flow of request for proposals. I should point out that this revenue stream is that an integral part of our strategy going forward for several reasons. First, it provides us with high visibility. Second, this visibility often provides the necessary margining knowledge for our traffic management products. Third, we believe there is significant amount of synergy and leverage in sales and marketing as the customers are often the same.

In addition, the trend in our industry is leaning towards a more design build, and integration type contracts which, we believe, is often a more cost effective approach in project implementation; the market niche we focus to further expand our addressable market. In design build contracts, we have the opportunity to apply our full complement of products and services. We believe this can be a significant differentiator going forward.

As I indicated earlier, we are increasingly seeing specific projects related to stimulus funds, and recently the $1.5 billion short-term TIGER, that stands for Transportation Investment Generating Economic Recovery funds, introduced by US Department of Transportation. We expected this funding to provide the near-term shot in the arm for our industry.

Our Transportation Systems backlog remains strong and we plan to continue to focus on executing our strategic plan, forging strategic relationships, and identifying key IPs and companies that can help accelerate our growth.

The Federal Highway Bill is up for renewal, and is expected to be about $450 billion for the next six years, approximately twice the size of the previous bill. If you recall, Iteris benefited dramatically from the last bill and we'll obviously be watching this closely.

In summary, we believe, one, we have weathered the worst part of the economic downturn. Some business may have moved to the right, but it is still there, and we expect the demand for expertise and technology to put us in an even better competitive situation as these contracts are let.

Two, our R&D group is very strong, and we believe we are producing the right products and providing timely delivery to market, which will not only help us to expand our market share, but should also increase the size of our addressable market. Three, the level of funding should significantly expand for our industry in the coming years, as America looks to solve its increasing congestion issues and repair its aging infrastructure.

Four, a key component to our sustainable product growth strategy is both top line and bottom line growth, through prudent investment innovation and sales and marketing. We also focus on execution of our operation of excellence initiative in pursuit of continuous improvement in efficiency. We believe we are beginning to see the fruits of the new Iteris in this regard. And finally, our associates and I understand and subscribe to the urgency and hard work needed to achieve our vision and strategic goals.

This concludes my remarks. We would be delighted to respond to questions and comments.

(Operator Instructions)

Our first question will be from the line of Jeff Van Sinderen from B. Riley. Please proceed.

Good afternoon. I have a question about your Vehicle Sensors business and the backlog increase that I think you spoke to there. What is driving that increase, and do you think it is sustainable? Maybe you can just talk more about what you think is behind that. And then, as a follow-up to that, maybe you can talk a little bit more about the restructuring of the Vehicle Sensors group and some of the efficiencies that you expect to have there.

Well, thank you, Mr. Van Sinderen. Yes, what we have seen in the last several weeks is both in the North American after market commercial truck that we focus on, additional demand. As an example, some of the food haulers we see that they are purchasing more. We also have seen expanded interests in our Safety Direct software, which really helps the operators and fleet owners with their active safety issues and telematics.

In addition to that, we have seen a few of the European OEMs putting more orders than they have during the Q1 just these last few weeks. So, the dynamics is such that I am cautiously optimistic about added and expanded orders in that area.

With regards to restructuring, we have essentially put together the operations and research and development of all our product lines together. The last step was done during Q1. So now the leverage and synergy that we get from our software group, as an example, from shipping, from the assembly line, all of these -- any duplications that we had in the past have gone away totally. We started this process about five quarters ago or so, and this was one of the key milestones that we achieved.

We have continued our strategic relationships and discussions with many potential partners. As I indicated in my prepared remarks, the European community is headed to mandate by year 2013 for the active safety, including Lane Departure Warning. And, that requires we anticipate significant higher demand. And, to do that for us we need to have a partner or partners, and we are focusing on that. So, I expect going forward the demand for that product line to significantly expand and I anticipate that we would be a direct beneficiary of that.

Okay, that's good to hear. And then, if we can shift over to Roadway Sensors, it seems as if orders are getting pushed out there, or some orders are getting pushed out. What can you tell us about the state of budget constraints? When you think some of those might free up? Any visibility you have there.

And then also, it looks like your orders for Roadway Sensors are expected to be up in the September quarter. Maybe you can talk about what you think is driving that business? Is that to free up the budgets, or is it seasonality, or is it anything else there that we should know about? And then also, do you think it is sustainable?

Sure. There is a bit of a seasonality, of course, in the summer we have the upper states doing more construction. And, what we have seen just in the last four weeks or so -- a pent-up demand in the vast majority of the states that we work with. There are a handful of the states that continue to be challenging such as California, as you very well know. And we believe that some of the orders may be moving to the right, but we firmly believe that they are not going away.

We do expect the revenue in the second quarter for the Roadway Sensors to increase sequentially. And overall, I feel optimistic by and large, due to the new products that we have been introducing to the market over the last 12 to 15 months.

In our industry, we have an interesting life cycle -- rather sales cycle. It could be anywhere from six to nine to 12 months. And, some of those key products, such as EdgeConnect, or RZ-4 Advanced, we are actually seeing a very positive reaction from the markets. So, putting those new products coupled with a change in the market environment, makes me believe that we should anticipate a higher revenue in the second quarter.

Okay. And, I think you said the concentration of new products was about 20% and you were thinking that was going to go to about 30% in Q2. Did I get that right?

Yes, you did, Jeff. We believe that the sales cycles on some of these key products are such that they would be expanding. So, as a percentage of revenue we anticipate those new products introduced to market in the last 12 months experiencing a higher PO, if you will. So, that is why we are estimating adding to the 20% of the experience and feel that it should be closer to 30%.

Okay. Do you think it grows from the 30%, or how should we think about that?

In the longer run, Jeff, I would say that -- yes, and that has been all by design. When 18 months ago we had started to see some of the market trends a key strategic approach was to really focus on the things that we have control on. We invested significantly in R&D and sales and marketing, and we are beginning to see the fruits of that. I firmly believe that that should continue in the quarters to come.

Just in June, you may recall that we introduced two new products, one being the VersiCam Wireless. Now, in this economic condition a wireless VersiCam product is very beneficial. Many jurisdictions are experiencing top budget constraints, and so they are trying to find ways of being more efficient. So when you go to VersiCam Wireless, you don't really need to extend the kind of infrastructure and communication infrastructure that you do without a wireless.

In addition, we introduced VantageView which is a software to really manage all the detection apparatus in the field, and we have already received a tremendous positive reaction from the market as well. So, these two coupled with the previous products, we believe, should continue be a significant component of our revenue in the future quarters.

Okay. So, when you think about your product mix for Q2 and you have an increasing concentration of new products, when we look at your gross margins on a consolidated basis or when you think about your consolidated gross margins, do you think that we will see that number increase sequentially versus the June quarter?

Well, let me give you a bit of a background and then I'll move to that. What we have experienced in the recent quarters is that the percentage of the Transportation Systems contracts as the overall revenue has increased and systems experiencing a lower margin that mix basically has impacted the reduction of the overall margin. With that said, to the extent that we go forward and I expect the percentage of the product sales gradually to increase as a percentage of the whole revenue. So, to that extent, I expect that our margin to improve going forward.

Okay, good to hear. Thanks very much, and good-bye.

Thank you, Mr. Van Sinderen.

(Operator Instructions)

Our next question will be from the line of Frank Magdlen from The Robins Group. Please proceed.

Good afternoon, Abbas.

Good afternoon, Mr. Magdlen.

When you look at your SG&A, have you wrung out most of the costs you are going to be able to do in that area?

Well, let me suggest that I am not done yet. But, a great portion of -- you have to realize that we started this process over a year and a half ago in a variety of ways. In my mind, operational excellence is a continuous process. So, perhaps another way of looking at this is that the goal is that as we go forward, the SG&A as a percentage of sales I expect to continue to decline. It may not be as dramatic as we experienced, 18% year-over-year, but that is the goal and it is a continuous process.

All right. And, back to Vehicle Sensors for a bit, what percentage of new truck builds going forward in North America do you think will have LDW on it?

That would be difficult to estimate, Mr. Magdlen. You got to realize that we have only touched the surface, and by far the majority of new trucks being produced are outside of the US and that has been much of our focus. And, I expect much of our revenue growth in that product line to be in the future quarters. But as it relates to US --

You can expand that just to worldwide if you would like and --

Sure. Overall, we anticipate that the market dynamics, which really is a key parameter in here, is the European mandate of the active safety in the commercial trucks in Europe is really going to drive much of the expansion of the sales. And, as that takes place, I expect that the after market would also expand as well; that is the typical class market trend.

So, in summary, going forward I expect not only the OEMs to expand on adding active safety, particularly Lane Departure Warning to their offerings, but also the after market to expand as well -- now as far as after market, particularly in North America - back to your question because that has been really a focus of ours as far as after market is concerned.

All right. The state weakness, California probably pops up as your biggest laggard so to speak. How -- Texas, Florida, and New York, how are they doing as well?

Texas is doing okay. We are seeing positive signs. We haven't seen the kind of budget challenges that California has. Florida is doing okay. We believe that we will experience some growth there in the next few quarters. New York has not been a significant market for us, and we are really still in the market development and expansion in the state of New York. And we, last year, started going direct in there and there is certainly a significant market there we just need to continue penetrating. So, the opportunities are there.

All right. Thank you very much.

You're welcome, Mr. Magdlen.

(Operator Instructions)

Our next question will be from the line of Brett Rice from Janney Montgomery Scott. Please proceed, sir.

Good afternoon, gentlemen. Thank you for taking my questions. The $900,000 in SG&A that show as a reduction, is that from headcount reduction, salary reduction, tightening up on T&E? Could you be a little bit more specific on that number?

Yes, Mr. Montgomery, thank you for the question. Let me address that in general, and then I will let Jim to expand on this. The SG&A really is comprehensive activities that we have started. And really, it includes a variety of components and even including moving of our headquarters, for example, that we went through. But, there are a variety of activities that we have gone through and it has everything from space efficiency to some reduction of staff that was focused more on G&A.

And, we really have not done much in the way of reduction in sales. That is very important to us. In fact, if any we have expanded the sales. So, much of that has been really in that. We have done some reduction in some of our corporate expenditures, as an example. And, Jim, you may want to add to this.

Sure, Mr. Rice. Some of the key reductions came in the areas of reductions in our audit fees as well as reduction in cost in Sarbanes-Oxley expenditures. We are now in our third year of Sarbanes-Oxley in compliance, so we have been able to gain some efficiencies in that area, as well as minor reductions across the board in all areas including IT and finance and accounting and other general areas.

We took the opportunity to, through this operational excellence program, to find efficiencies across the board. And, we are starting to see some of those show up and it was very dramatic this quarter.

Right. Is that formally a good number, a good run rate going forward?

Well, I think in general that is probably a fair statement. What we may end up doing from time to time, increasing on the sales component of it. For some foreseeable futures I don't expect really any -- certainly, addition to the G&A. If any, there might be still some slight reduction. But, for general purposes, perhaps that might be a good run rate at least for the next couple of quarters or so beyond that, we will see.

Okay. And, what about the run rate on R&D? It is about $230,000 less than last quarter, at $964,000. Is that kind of what it is going to be quarterly going forward?

I think that is the fair assumption also. The one comment I should make in the R&D. I certainly don't want to give any perception that we have quote unquote reduced R&D year-over-year. We have done -- again as part of this operational excellence and restructuring, we have hired a lot more software people and perhaps reduced the areas that we weren't focusing on.

So, from an overall throughput and product reduction, we are actually doing a lot more now with this workforce than we did, let's say, three years ago or two years ago for that matter, so it is more of a reshaping. But, yes, that seems certainly reasonable again at least for the next couple of quarters, that sort of a run rate.

Right. What did the cash flow metrics of the quarter look like?

Mr. Rice, we were able to continue to generate a positive cash flow from operations, albeit it will be less than $100,000 for the quarter. So, that clearly is a result of the decline in sales.

But you still had positive cash flow.

But we still were able to generate positive cash flow. And in my comments -- what we are doing to continue to -- and plan to continue to improve on that, is to aggressively collect our cash and to manage inventory and the rest of the balance, to make sure that the trend of positive cash flow continues.

I have been really pleased with how we have managed all of that. When you look at the year-over-year, we are now sitting with over $6 million worth of cash on hand, and a year ago it was probably a few hundred thousand dollars if I recall correctly. So, that has been a really positive thing. And, it also by part it stems from much of the customer community that we are dealing with has very little risk of payment or too much of a delay. I mean, these are agencies that, until they have the money in the bank, they don't let the contract., so that dynamic really helps us.

One final question, in the -- just spirit of your sales force, when sales go down sometimes sales people -- I'm in sales, it can depress one. How is the spirit of your sales force?

Well, that is an excellent question. The fact that we have not only reduced but added and introduced a lot of new innovative and new products into the market, we continually engage all of our sales force into that kind of communication and providing input as to what market needs and in developing these new products. We talk to them quite often. I personally talk to these individuals and meet them. From my point of view, the morale is very high.

You know, they are professionals. They also realize that the industry or the downturn of the economy is something that has an impact on the entire industry and that we plan to continue introducing those innovative products. So, they get excited with all of that. They also see the prospects going forward.

So we have had really, it may sound corny, but really a tremendous enthusiasm and excitement in our sales force when they get together and talk about what we have done and what we are planning to do. You turn around and there is another new product that they have to go and sell, and our customers get excited. We receive the positive feedback. So, I appreciate the question, but it really in my view is quite high as far as morale goes.

Good. Thanks to both of you for taking my questions.

Thank you, sir.

Thank you.

(Operator Instructions)

Okay. At this time, we have no additional questions. I will turn the call back over to you, sir.

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

And we thank you, ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a great day.