Iteris Inc (ITI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Iteris Incorporated Earnings Conference Call. My name is Dwayne 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 session toward the end of this call. (Operator Instructions).

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

Thank you, Dwayne. Good afternoon and welcome to the Iteris Second Quarter 2010 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'll recap the financial results of our fiscal 2010 second quarter and then Abbas will provide further commentary about our business. At the conclusion of Abbas' comments, we'll open the call for questions.

Before proceeding, I 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 of the forward-looking statements.

For the second quarter ended September 30th, 2009, our net sales and contract revenues decreased approximately 22% to $14.9 million, compared to $19.1 million in the same quarter of the prior year. Despite the year-over-year decrease in both our roadway and vehicle sensor segments, net sales grew sequentially from the prior quarter.

Roadway sensor net sales grew approximately 20.5% to $7.1 million, while vehicle sensors net sales increased by approximately 30.5% to $1.4 million. These increases were partially offset, however, by a sequential decrease in transportation systems contract revenues of approximately 17% to $6.4 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 second quarter increased to 44.2% from 41.3% in the prior year quarter, an increase from 37.4% reported in the preceding quarter. The increase in gross margins was primarily a result of a larger percentage of total net sales and contract revenues derived from product sales, which historically provide higher gross margins than contract revenues.

Additionally, our second quarter contract revenues included lower sub-consulting content than the prior year quarter and sequential quarter. This, in addition to a higher concentration of internal Iteris labor, resulted in a transportation systems group gross margin of 39.4%. Transportation systems gross margins are typically in the mid-30% range.

The Company reported operating income of $1.1 million for the current quarter, compared to operating income of $2.1 million in the prior year quarter. Current quarter operating expenses decreased by approximately 6.2% to $5.5 million, compared to $5.8 million reported in the year ago quarter.

This was primarily a result of our continued efforts to maximize efficiencies through operational excellence initiatives that include prudent cost-cutting measures and the reduction of certain general administrative expenses and research and development expenses due to a higher degree of efficiency and refinement of our engineering skill set.

Net income for the second quarter was $543,000 or $0.02 per fully diluted share, compared to net income of $1.1 million or $0.03 per fully diluted share in the prior year quarter. I'm pleased to announce we ended the quarter with approximately $9.2 million in cash and generated approximately $3.6 million in positive cash from our operations this quarter.

We have not yet drawn on our $12 million line of credit with our senior lender and have reduced our long-term debt by almost $600,000 since March '09. We plan to continue to focus on aggressive cash collections and inventory management in an effort to further improve our cash position and the overall financial strength of the company.

Now, I'd 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 to say that, as we expected, we were able to expand our product sales significantly when compared to the last quarter. Roadway sensors net sales grew by 20%, while the vehicle sensors net sales increased by 30%. In the roadway sensors market, we had an increase in sales in key states such as California and more revenues due to increases in the stimulus package funded projects. In the vehicle sensors market, we received increased orders primarily from the [FootHollars] fleets. In addition, some of our European OEM orders expanded as the truck production rate began to stabilize.

This sequential growth combined with continued management of our operating expenses and our ability to expand our gross profit margins enabled us to increase our operating income to $1.1 million. In addition, despite the sequential decline in transportation systems contract revenues due to a reduction in sub-consulting content, our contract backlog increased to $31 million. We believe this is an excellent leading indicator of future growth.

We expanded our gross profit margin compared sequentially to the first quarter, as well as year-over-year, to geographic and product mix and in part, higher margins on new products and system contracts with reduced sub-consulting content. Further, our continued implementation of operational excellence led to a decline in operating expenses year-over-year.

I believe our leaner and more efficient organization combined with our solid balance sheet and a strong cash position is affording us the opportunity to use this economically challenging time to become a stronger company and is allowing us to execute our strategic plan. Two key elements of the plan include innovative R&D and Sales & Marketing.

First, I will further discuss our quarter R&D efforts. Our new products have received a very positive market response. In fact, for the second quarter, over 24% of our roadway sensors sales were attributed to new products introduced over the last 12 months. We also began shipping our new stock for VantageView central software. VantageView is a web-based integrated software platform that enables the traffic manager to manage a view -- to view their VantageView video detection assets remotely over a network connection.

In transportation systems, we completed the development of a net scene and integrated tool software, helping the traffic management center operators to monitor and better manage their area-wide ITS field unit assets. In vehicles sensors, we have developed a new active safety feature called Forward Collision Warning and have already sold samples to truck OEMs. Combined with our Lane Departure Warning system, Forward Collision is considered to be a key feature demanded by the market with a high potential for revenue growth.

We plan to continue 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 we believe will provide us with increased operational leverage and enable us to increase the long-term earnings power of the company.

On the marketing front, we have recently added several of the staff to expand our sales and marketing efforts and presence in the marketplace. This includes not only domestic sales and marketing executives in US East and West coasts, but also the international market. We have increased our proposal activities, particularly in the design-build area, a growing market niche for Iteris.

While the economic slowdown has affected new truck sales, we are seeing a gradual and a steady increase in both OEMs and aftermarket orders. We believe that a major opportunity for Iteris is the European community mandate of key active safety features, including Lane Departure Warning, in commercial vehicles starting in 2013. Iteris is fast to benefit from this potential significant increase in demand and we are currently in partnership discussions with key companies to prepare.

In spite of the federal stimulus package, many municipalities continue to face budgetary issues and spending for new roadways and systems to address congestion, in some cases, being delayed. We believe that these projects and construction are necessary and won't just go away. They will eventually be started and completed. This is why we believe our pipeline of projects remains intact and robust.

Some projects are shifted into the future and we firmly believe we'll benefit from our efforts to track markets and bids in the coming quarters, as opportunities become available. Our current backlog for transportation systems projects is approximately $31 million. And during the second quarter, we signed an additional $8.4 million of new contracts.

During Q2, we received several awards in both products and services, totaling $1.5 million from over 10 different contracts funded by the stimulus package. We are bidding and have outstanding proposals on several contracts worth over $8 million throughout the country to capture more revenues funded by the stimulus package.

We believe the overall transportation funding will continue to increase and Iteris will be beneficiary of that. The key component will be the Federal Highway Bill, which 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 will obviously be watching this closely as it goes through Congress.

This bill is moving slowly and has already faced delays. This is not uncommon for legislation, particularly a spending bill as large as this. And obviously, the Federal government is focused on a variety of high profile issues. We are not concerned about the current delays and remain confident this bill will pass and will ultimately benefit Iteris. We expect the funding to continue at the current rate while the bill is delayed.

In summary, we are pleased with the increase in product sales and profit sustainability and we expect the demand for our expertise and technology will put us in an even better competitive position going forward. Our R&D group is very strong. We are producing the right products as demanded by the market, which we expect will help us to expand our market share and increase the size of our addressable market. We anticipate that the level of funding will significantly expand for our industry in the coming years, as America looks to solve its increasing congestion issues and repair its aging infrastructure.

A key component to our sustainable product growth strategy is both top line and bottom line growth through prudent investment in innovation and sales and marketing. We plan to focus on the execution of our operational excellence initiative in pursuit of continuous improvement in efficiency. We believe we are benefiting from this strategy and we continue to subscribe to it.

Our third quarter is historically soft, primarily due to seasonal impact. Nevertheless, we expect a profitable quarter. We plan to focus on executing on a strategic plan, forging strategic relationships and identifying key IPs and companies that can help us accelerate our growth. Finally, as I have stated before, our associates and I understand the urgency and hard work needed to achieve our vision and strategic goals.

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

(Operator Instructions).

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

Good afternoon. I guess my first question is really about the outlook for the subsystems work versus direct labor and how we should think about the overall revenue mix for Q3 and going forward and consolidated gross margin for Q3, and then, further out?

Thank you, Mr. Van Sinderen. Yes. The sub-consulting content of our transportation systems contract was reduced during Q2. I should point out that, as a background, that a few years ago we made a conscious decision to (inaudible -- technical difficulty) which typically these larger projects have a larger content in sub-consultants. And we relatively have been steady on those.

This last quarter, we actually completed a major project that we had with the Los Angeles Metropolitan Transportation Authority. And that had a significant sub-consultant content. We believe going forward, that balance is going to be stabilized. In fact, in Q3, we believe that the sub-consulting content would be more than what we experienced in Q2. And going forward in the future quarters, we expect and plan to further make that the balance in such a way that we enjoy that higher revenue.

I should point out, however, that typically those sub-consulting content do not enjoy a high margin. So sometimes, we may be having, let's say, a few percent -- sometimes 5%, rarely maybe 10% rap on those. In many cases, the agencies would want us to just have that as a pass-through. So, despite the fact that we had that drop, it really did not have a profound impact on the operating income of the transportation systems revenue.

Okay. And then, if we can switch over for a minute to roadway sensors and vehicle. In terms of Q3, should we look for -- I know, seasonally, it's a softer period, especially for the Vantage type product. But how should we be thinking about it in vehicle? It sounds like you're a little bit more upbeat on the truck market. Maybe you could give us some more thoughts and color there.

Yes. You're right. Seasonally, historically, our third quarter is the lightest for obvious reasons, particularly on the product side with the less construction that we would experience. I believe that the third quarter would be a solid quarter, would be a profitable quarter. In the longer term, let's say the fourth quarter and beyond, I certainly would be even more optimistic.

I couldn't really comment, Mr. Van Sinderen, an exact amount of, let's say, a revenue that we would be experiencing in Q3. But all the signs that we have seen now would lead me to believe that we are certainly in the way of recovery as the results indicated in Q2 -- significant increase in both the product lines in our sensor segment, sequentially. So, I feel positive for Q3. Again, notwithstanding the historical impact of the seasonality.

We have received some good orders already, both in vehicle and roadway sensors. We have started the quarter, in fact, stronger than the last two quarters in the roadway sensors in the way of backlog. We haven't finished October yet. We already have several good sized aftermarket orders for the vehicle sensors. So, I feel pretty comfortable that we would achieve a solid quarter.

Okay. So do you feel like -- I guess what I'm taking from that is that it sounds like you feel that the truck market is improving. Do you think we're turning the corner, now, in the truck market, in terms of the end market?

We certainly have seen improvement, both on the aftermarket, particularly with the FootHollars and we have received new orders over the last couple of months. And just coming back from Europe, by the way, couple of months ago -- couple of weeks ago rather, talking to several of our OEMs, I sense that the production rate is stabilizing, although far from what it used to be but a slight increase over what we were seeing, let's say, four or five months ago. So, I believe that that stabilizing of the production would help us to continue getting a more steady and gradual increase in our OEM orders, as well.

Okay. Good to hear. Thanks very much. I'll let someone else jump in.

You're welcome.

(Operator Instructions).

Our next question will be from the line of Joe Giamichael from Rodman & Renshaw. Please proceed.

Good afternoon, gentlemen.

Good afternoon, Mr. Giamichael.

You -- I mean, you've covered a lot of material so far in the call. So, a lot of my questions have already been answered. I guess just on the sales and marketing side, I know that this is definitely a near-term focus for you and you are committing the resources to it. Can you just sort of describe to us where and how those resources are being deployed?

Yes, in perhaps two or three different levels, Mr. Giamichael. First, one of the areas that we have been adding more emphasis is the design build projects. That has been more of the trend as of late. And several of the projects and contracts that are funded by the stimulus package tend to be of that nature.

As an example, we recently submitted several bids in the state of Michigan as we are preparing for additional bids in California and other states. And these are typically the type of contracts that we either would be leading or we would be subbing to a major, let's say, a multidisciplinary or civil engineering firm. And they typically have several million dollars worth of effort for us.

The other activity that we are doing -- by design, we are expanding our international presence in the roadway sensor. So, we recently have added another regional manager to cover, for example, European and Middle Eastern territories for us. Those are the types of activities we are doing to make sure that we position ourselves appropriately to take advantage of the contracts and opportunities in both the systems and the sensor products going forward.

In order to complete that European expansion, is it really just a human capital aspect? Or are there physical assets that are involved?

Minimal physical assets, Mr. Giamichael. But it not only requires additional staff, but further penetration into investments in other related sales and marketing activities. Just as an example, in the first week of December, we have a major show called Gulf Traffic located in Dubai. I personally would be attending and we are actually having a much larger group to attend this time, just because we see that market expanding. So, it does include both investment in resources in the way of personnel as well as sales and marketing and trade shows and visits and so on.

Okay. That's all I've got. Thanks, guys.

You're welcome.

(Operator Instructions).

And our next question will be from the line of Brett Rice from Janney Montgomery. Please proceed.

Good afternoon, gentlemen.

Good afternoon, sir.

Has the balance sheet and free cash flow gone up to sufficient levels that a share buyback might be considered in the near- to intermediate-term future?

We discussed that. In fact, we have been discussing it at every one of our Board meetings, just to recap and deliberate on it over the last several Board meetings. At the moment, what we feel is important for us is to utilize our cash for R&D purposes for other initiatives that would be important for our growth. At the moment, we are not ready for a stock buyback. But that is not to say that we are not considering it from time-to-time as the value dynamics of our market and our sales price per share will change and so on. That's a great question, though.

Okay. And one other, if I may. The goodwill that's on the balance sheet -- can you refresh my recollection? What gave rise to that, what historic events?

Sure. This is Jim Miele.

Yes. Hi, Jim.

The majority of the goodwill, at least the last addition, occurred in 2004 when Iteris was merged in the roll-up merger with its former parent company. And that gave rise to about $17 million or $18 million of the goodwill. The remaining goodwill had been on the books of Iteris and that was related to certain acquisitions in the 1997 and 1998 timeframe that really were the formation of the company.

The Rockwell Systems Transportation Group, the Meyer, Mohaddes and Associates Firm were the two main reasons that the goodwill was booked in those timeframes. So, it was a combination of the intention of the company in '97, '98 and the roll-up merger in '04 that gave rise to the goodwill.

With what we've gone through the last year or so with financial turmoil -- if we've not had to take any goodwill write-downs the last year or so, is it a high probability bet that we're not going to see any kind of goodwill write-down in the near- to intermediate-term?

Well, I couldn't really handicap that or project forward. But I can tell you that it's something that we certainly look at as required by GAAP on an annual basis. And now, we're looking at it quarterly, depending on whether there are indicators of goodwill impairment. And through the second quarter and through our year-end, we've not had to take goodwill charges and we will continue to monitor that quarterly.

Right, right. Now, could you just say a little bit more on the mandates of Lane Departure Warning systems in Europe? I mean, is that -- I mean, it's a fairly complete -- it's going to happen? And then, do you have to bid on this business or that business is there for you?

Excellent question. Yes. All indications are that this mandate is going to happen. There are various committees that have been established by the European community that is focusing on specifics of those features. Today, we know for fact that Lane Departure Warning is one, Emergency Braking is another and there may be just these two. And the committees are looking into the details of the specification for these.

So, we believe that it will be going through. Many of the OEMs are preparing for it. And this by the way will take place for Class III to Class VIII. So that means, primarily, the large trucks and also those that are heavier than 10 tons. And what would happen in practice is that the OEMs would be generating requests for proposals and there would be competition in most, if not in all, cases for the Tier 1s and others to come in and bid.

We feel very good about this just because we have had the major share of the market and have had the more than 2 billion miles of experience on Lane Departure Warning. And, of course, we are in discussion with potential partners that could help us to respond to such a high demand at the proper price. And it's an exciting time for us going forward as we believe that the prospect of us benefiting directly is quite a bit.

If I had to guess, I would say that -- let's say the sales in this arena for the overall market is going to be, perhaps, somewhere between 15 to 30 times what it has been in the past. So, it's a dramatic change and shift of the demand. Of course, that would then generate competition, as well. So, we are not taking that one lightly either. So, this is a crucial time for us over the next several quarters to really prepare for something of this nature.

Do you have a -- when you say 50 to 30 times the existing market -- how much is the existing market now, so I can get a ballpark of -- like with a drug, is it a $1 billion market? What is it?

Sure. By the way, about 15, 1-5 to 30, 3-0.

Okay.

The -- if I had to estimate, there are companies that are selling products that are private, so this is a rough estimate that -- let's say if the market has been about -- for the commercial market only, in the recent two or three years, average -- let's say $5 million to $15 million. And I'm going to give you a wider range. Then, just multiplying that, it is certainly going to be over $100 million by the year 2013 and beyond because of that mandate.

The other data that I could give you is that the truck production -- in good years, the truck production was about $0.5 billion at trucks. Now, that has changed, even at 50% of that -- you could do the math -- and that mandate could really change that. Now, when I said the $0.5 billion -- $0.5 million, rather -- this was Class VIII only. In other words, the 18-wheelers. Now, we have probably just as much in the Class III to VII, which is the 10,000 kilograms and more trucks. So, it's a large volume. I hope that helps.

Yes. I appreciate it. Thank you for answering my questions and cash generation and expanding margins we like. Take care.

You're welcome, sir.

Thank you. Our next question will be from the line of Ben Burditt from Special Situations. Please proceed.

Sorry, I'm here. I had a quick question. Could you review again what the free cash flow from operations was for the first quarter and second quarter?

The first quarter was de minimus. It was I think around $25,000. And the second quarter free cash flow from operations was a little north of $3.6 million.

Okay. And how do I look at -- I'm not going through the details, but just to lift off of waves, was a lot of that one-time? Or was a lot of that kind of continuous, kind of cash flow quarter-on-quarter earnings power? Or how do you look at that?

I look at it a couple of different ways. Some of it is because the company continues to be profitable and generate positive operating income and positive EBITDA. There are a limited amount of debt payments going out of company now that the debt has been refinanced. So, the company's able to keep cash in the company. We've also aggressively focused on cash collections of our receivables.

Historically, the DSOs for our contract receivables are longer than traditional product receivables. And before things get too old, we want to aggressively focus on collecting all of our receivables, which we've been successful at. We'll continue that and that trend should continue. And then, the other main reason that we saw some cash is because of inventory reduction. We had a pretty significant inventory reduction because we started to ship more product.

So, if any of these events were one-time, it would be in the inventory arena. But we continue to try to manage our inventory smartly to keep the levels at what they are currently or maybe even lower. So, if the company keeps making positive EBITDA and we keep collecting cash and managing inventory, we should generate positive cash flow at a very good clip.

And what -- just remind me again. What is your cash and your debt as of right now?

Current cash position is around $9.2 million. The total debt outstanding on the term debt is about $6.7 million.

We are very happy to suggest that we are really cash positive.

Absolutely. All right, great job. Thanks a lot.

Thank you, sir.

Thank you. And our next question will be from the line of Jeff Van Sinderen from B. Riley. Please proceed.

Just a couple of follow-ups. Abbas, maybe you can talk a little bit more about Safety Direct and the kind of traction that you're getting there and then, how that business could ramp in coming quarters.

Yes. The Safety Direct -- we just came back from the American Trucking Association, or ATA. And we saw a tremendous positive response from this particular product, talking to people. We are in demonstration in several fleets. And we really believe that the features that this software is offering the dispatchers is tremendous.

It is basically someone -- the ability for someone that is driving, let's say, in a freeway in Iowa that is within a short period of time -- say, five, 10 minutes -- keep getting out of lane. And the dispatcher in California could see that, could talk to that person and say, "Hey, look. You need some rest." It has a tremendous value, particularly for fleets that are self-insured. And they really equate that to their reduction in accidents and how fast the system could pay off for itself.

So, that is happening. What we expect going forward is that really the acceptance of this software would lead the sales of the product associated with it. And then, in addition to that, the Forward Collision Warning that we are completing, and once we have it ready to get into production, we would make an announcement on this. It's a tremendous feature that when you combine the Forward Collision Warning and Lane Departure, now you have really a suite of active safety that could, in fact, reduce the accidents tremendously.

Okay. Now, is the Forward Collision Warning device that you guys have different from some of the other similar devices out there? Is it unique? Or how should we think about that?

Yes, it is. We have had this partnership with Delphi that we have been providing the radar version of this, and it is very well accepted worldwide. What we are doing now is really using our camera and imaging alternative. So, it's a different technology that we are offering to market to primarily perform the same function.

Okay. And is that something that would go into both the passenger car and the truck market? Or how should we think about that?

Yes, our focus at the moment is the truck market. We are not, at the moment, prepared to discuss the passenger car strategy. And as far as the trucks, again, the focus is two-fold. One, the aftermarket and also for the OEMs, as well.

Okay. So, that's a product that sounds like it has significant potential, but it's still early?

That's correct.

Okay.

We anticipate the production end of this year, early next year having that announcement at that time. But we have been, by design, emphasizing on development of this for some time now.

Okay. Great to hear. Thanks very much and good luck this quarter.

Thank you, sir.

Thank you and this concludes the question-and-answer session. I'm going to hand the call back over to Jim Miele for closing remarks. Please proceed, sir.

Actually, I'll hand the call back over to Abbas for the closing remarks.

Ladies and gentlemen, again, we appreciate everyone's support and look forward to updating you on our continuing progress. And I'll pass it onto Dwayne, again.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. We thank you all for joining. Have a good day.