Iteris Inc (ITI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Iteris Incorporated Earnings Conference Call. My name is Stephanie, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today Mr. Jim Miele, Chief Financial Officer. You may proceed.

Thank you, operator. Good afternoon, and welcome to the Iteris third 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 will recap the financial results of our fiscal 2010 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 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 third quarter ended December 31, 2009, our net sales and contract revenues decreased 17.5% to $13.6 million, compared to $16.5 million in the same quarter of the prior year. Vehicle Sensors net sales decreased roughly 40% to $1.7 million when compared to the prior year period, however grew sequentially for the second straight quarter by approximately 21%.

Roadway Sensors net sales declined by approximately 9% to $5.7 million compared to the prior year period, while Transportation Systems contract revenues decreased by approximately 16% to $6.2 million. As there are different characteristics affecting each of our revenue streams, Abbas will provide more detail regarding net sales in contract revenues later in his comments.

Gross margins for the third quarter increased to 40.8% from 39.5% in the prior year quarter. The increase in gross margins was primarily a result of a more favorable sales mix of our Roadway Sensors products in terms of geography, and to a lesser extent better margins in our systems consulting segment due to contract mix.

Current quarter operating expenses decreased by approximately 8% to $4.8 million compared to $5.3 million reported in the year ago quarter, primarily as a result of our efforts to maximize efficiencies through operational excellence initiatives that include prudent cost-cutting measures and the reduction of certain systems consulting and corporate general and administrative expenses.

The Company reported income of $694,000 for the current quarter, compared to operating income of $1.2 million for the prior year quarter. Net income for the third quarter was $709,000 or $0.02 per fully diluted share, compared to net income of $741,000 or $0.02 per fully diluted share in the prior year quarter.

We ended the quarter with approximately $9.4 million in cash and generated roughly $1.2 million in positive cash from our operations, and $4.9 million for the nine-month period ending December 31.

We have not yet drawn upon our $12 million line of credit with our senior lender, and have reduced our long-term debt by almost $800,000 since March of '09. We plan to continue to focus aggressively on cash collections and asset management in an effort to further improve our cash position and the overall financial strength of the Company.

Now, I would like to turn the call over to Abbas who will further discuss the quarter and our strategy in greater detail. Abbas?

Thanks, Jim. I am pleased to announce another profitable quarter despite the decline in sales, which was primarily due to seasonal nature of our business as well as current macro-economic conditions. Consistent with our operational excellence initiative, we continue reducing operating expenses as well as cost of goods, enabling us to improve our gross profit margin.

Further, we made progress in various strategic initiatives including introduction of a new detection product, new sales channels, international expansion and strategic partnerships. We also continue to strengthen our balance sheet.

I would like to comment on each revenue stream and address key drivers contributing to our expected growth. Roadway Sensors net sales declined by 9% sequentially. Our third quarter has been typically soft due to weather conditions and decrease in construction during these months. However, gross margin expanded as a result of product mix as well as reduction in cost of goods.

Over 20% of the products we sold during the quarter were introduced to market over the last five quarters, and we expect our products to continue attract existing and new customers. We introduced a new product to market, Pico, which is specifically targeted for the international market, responding to the standards and functional requirements of that market.

In addition, we are offering Pico as a great value on price and expect a favorable market reaction. We plan to continue expanding our sales and marketing activities in key international markets to better prepare for the expected demand. We are also in partnership discussions with key system integrators and distribution channels, which we believe will allow us to better access key international markets not currently available to us.

Two key drivers for this revenue stream in the upcoming quarters are expected to be, A, increasing traction in domestic markets, and B, traction in international sales and forging partnerships to expand the distribution channels internationally. Of course, we plan to keep our commitment to continue innovating and offer new products to market.

In the Vehicle Sensors market, we received increased orders and grew 21% sequentially. Two key drivers are expected to help this revenue stream grow in the future. First, as I indicated during the last earnings call, the European Union is planning to mandate key active safety features, which we believe will include Lane Departure Warning for all new commercial trucks beginning year 2013, and we are preparing to respond to this demand in several aspects, which for competitive purposes I cannot elaborate upon.

Second, we plan to be in production for the Forward Collision Warning System this quarter, and expect a favorable reaction from the commercial truck market. In fact, we have already sold samples to truck OEMs and anticipate a pent-up demand.

In this revenue stream, we have seen a stabilizing production rate and a gradual increase in orders. Also, our Safety Direct software has continued to attract new test fleets and we anticipate the current test fleets will achieve favorable results based on early feedback.

In Transportation Systems, we saw 16% reduction in sales sequentially, primarily due to reduction in sub-consultant content delay and reduction in key contracts in South-East. However, we continue to expand the backlog and finished the quarter strong with $32 million in total backlog.

Key drivers in this revenue stream are expected to include; first, our focus on large contracts, or as we refer to them mega projects. Typically, they are several million dollar contracts. We are tracking several such contracts and expect to expand our revenues as a result.

Second, we anticipate progress in the development of new and expansion in niche technical markets. We are developing key integration software tools, which we believe will position us for several large upcoming contracts.

At the corporate level, we are enjoying the benefits of operational excellence initiatives. Our operating expenses decreased 11% sequentially in the quarter ended December 31st and 9% year-over-year. We also have $9.4 million in cash and no borrowing against our line of credit as of December 31st '09.

As I have indicated in the past, we believe the overall transportation funding will continue to increase and expect Iteris will be beneficiary of that. A key component will be the Federal Highway Bill, which is up for renewal and expected to be over $450 billion for the next six years or approximately twice the size of the previous bill.

If you recall, Iteris benefited from the last bill and will obviously be watching this closely as it goes through the 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 believe a bill will pass and will ultimately benefit Iteris. We expect the funding to continue at approximately the current rate, while the bill is delayed.

In summary, one, we are pleased with achieving profitability for 17 consecutive quarters, improved margins, sequential increase in contract backlog, and increase in Vehicle Sensor sales. Our profit sustainability, commitment to R&D and innovation, and expected demand for our expertise and technology should put us in an even better competitive position going forward.

Two, we believe 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. Key drivers are expected to be for Roadway Sensors; expand their traction domestically and the international market.

In Vehicle Sensors; favorable market reaction to our new forward collision warning product and the demand for LDW in response to European Union mandate. And for Transportation Systems, we expect our software based integration tools will provide us with favorable position in system integration market and our ability to further penetrate in the mega project markets.

Three, we anticipate that the level of funding will significantly expand for our industry in the coming years. We anticipate significant funding applicable to our products and services to be included in the highway bill. In addition, we expect that we may be able to take advantage of dedicated transportation funds through various bonds, dedicated sales tax and gas tax in the coming quarters.

Four, a key component to our sustainable product growth strategy is to expand 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 currently benefiting from this strategy and we plan to continue to subscribe to it.

Today, we have benefited from a range of activities from reduction in cost of goods for our products to expenses related to being a public company, as well as reduced G&A. As you can see from today's results, we have continued to make progress in these efforts, expanding our gross margin and our operating profit, even as revenues have declined.

Five, our third quarter has historically been soft primarily due to seasonality; nevertheless, we had a profitable quarter. We expect our fourth quarter to be strong, both in sales and operating income, and we expect to see improvement on a sequential basis.

Six, we plan to focus on executing on the strategic plan, forging strategic partnerships and identifying key IPs and companies that we believe can help us accelerate our growth. We are currently in discussions with several strategic partners, and we expect it will result in expanded sales for us in the upcoming quarters. This concludes my remarks. We will be delighted to respond to questions and comments.

(Operator Instructions)

Our first question comes from the line of Jeff Van Sinderen with B. Riley. You may proceed.

Hi, good afternoon. Couple of questions -- wanted to get a sense, I know you mentioned the fund issues with some of the municipalities and so forth, just being difficult for some of those funds to be released. And I am wondering if there is other things that you see that could start to help those funds be released aside from the Federal Highway Bill? Is there anything else out there that could start to free-up some of that money?

Thank you, good afternoon, Mr. Van Sinderen. Yes, there are several funding sources that we believe would help us outside of the Federal Bill. There are a variety of measures and values to states. For example, in California, we have Measure M, Measure R. These are dedicated funds that would come to transportation. We also benefit from sales tax in a variety of states, again special assessments, bond measures that are available and also stimulus funds.

The first round, we benefited a little bit. We anticipate, going forward, some of the technology oriented types of contracts are, now that we are exhausting some of the concrete and pavement and refurbishing stuff has to come forward. So, I feel positive about combination of various funds that could come forward. Having said all of that, the Federal fund is continuing at its current level, so it is not stopping while the new bill is being delayed. So, that continuous revenue source is also going to help going forward.

Got it, okay. And then, also, I know that you guys are -- you are trying to make inroads into international markets. Just wondering if you can update us on -- basically if you can update us on the truck market for the aftermarket portion, and then also update us on the truck market for the OEMs and just any more color you can give us and that would be helpful.

Absolutely, I could certainly tell you with a great degree of confidence that we have seen the truck market OEM and the fleets stabilizing, and the revenue that we enjoyed during the third quarter being 21% sequentially up perhaps stems from that nature and that helps me be optimistic about it. We are in discussion with several of our OEMs to expand our current contracts, and we anticipate and expect announcements of that coming forward in the upcoming weeks and perhaps a few months.

On the aftermarket, we have seen some of the fleets started buying. This Q4 that we just started, has a good magnitude and I believe that sequentially we will do better, again in this quarter than we did in Q3, in which sales was up over the last quarter. At the moment, we don't see any significant uptake to the degree that it was, let's say, a couple of years ago.

But, certainly all indications are headed for gradual growth of that market. One other side note; our Japanese customer Fuso has started ordering again, which itself is quite a positive indicator for us internationally.

Okay. That's good to hear. And then you mentioned a new major product offer in vehicle and then you also mentioned some new strategic partners. Just wondering if you can expand on those two items.

Sure. On the new product, it is called the Forward Collision Warning or FCW, which we believe is such a major feature, as you are driving, the ability to know how close you are from a safer stopping distance to the vehicle ahead of you.

Particularly in the commercial world, we have already sold several samples either going to production before this quarter is over. And we have already received favorable feedbacks from many of these fleets. And going forward, we feel that this feature combined with the Lane Departure Warning really could help us expand our traction domestically and internationally.

Okay, good. I guess just as -- I am sort of looking through the P&L, it seems like the comparisons start to get easier for you in the June quarter and wondering how you are thinking about the March quarter. Do you think we still see a year-over-year decline in revenues? Obviously, you have tightened expenses. That helped you in the December quarter.

Any thoughts you can give us on when you think you will start to be either flat on revenues, or you will start to show year-over-year revenue increases? Do you think that can happen in March, or do you think we are looking more at the June quarter for that?

Well, I certainly hope and expect this quarter be close flat year-over-year. But I certainly am expecting sequentially Q4 be better than the Q3 that we just finished. So -- and you could of course anticipate with kinds of operational excellence initiative activities that we have done should have a nice positive impact also on operating income as the sales begin to improve.

So, it is certainly in the near term a turnaround for us and I feel quite optimistic and expect, really, that posture to continue as we get into our next fiscal year.

That's great to hear. And do you feel like you still have more room to grow gross margin, or to expand gross margin?

There is always room to grow that. And the reason I say that, Jeff, is really for several reasons and I'll highlight perhaps just couple of them. Part of this operational excellence that we have started about 18 months ago or so, we started looking at our cost of goods.

And while we are looking at improving the product and getting new products to market, we are also looking at our arrangement with the inventory, with the actual products and parts that we are purchasing; better negotiation on those. We have gone through evaluation of contract manufacturers; we have made some changes along those lines.

So, despite the price pressure that we anticipate going forward, we feel that the cost-of-good reductions and other efficiencies in the company should help us not only to sustain the combined margin that we are enjoying now, but perhaps to improve it.

Another area that, again, is helping my optimism is that this whole gradual movement towards more software based activities that we are doing in all of our revenue streams. When we get into more and more software design and software oriented type of products, we expect the margins improve in absolute fashion. And so, when you combine all of that, I feel optimistic in a possible margin improvement going forward.

Okay, that's good to hear. Thanks very much, and good luck this quarter.

Thank you, sir.

(Operator Instructions)

At this time, there are no further questions. I would like to turn the call over to Mr. Abbas Mohaddes, CEO, for closing remarks. You may proceed.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.