Iteris Inc (ITI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2010 Iteris Incorporated earnings conference call. I'll be your conference moderator 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 the conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

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

Thank you, Stacy. Good afternoon and welcome to the Iteris fourth 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 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'd like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events, or the future performance of the Company. The forward-looking statements we 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're 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 fourth quarter ended March 31, 2010, our net sales and contract revenues decreased 8.6% to $15 million compared to $16.4 million in the same quarter of the prior year. The decrease was mainly as a result of a 29% decline in Transportation Systems contract revenues offset by a 17% increase in Vehicle Sensors net sales, and a 13% increase in roadway sensors net sales. The decline in systems contract revenues was due to the acceleration and timing of certain contract awards in the prior year period. 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 fourth quarter increased to 43.2%, compared to 35.3% in the prior year. The increase in gross margins was primarily a result of sales mix more weighted towards product sales, which produce higher gross margins, as well as better overall gross margins in our systems consulting segment due to contract mix. Current quarter operating expenses increased 11.8% to $5.3 million compared to $4.7 million reported in the year ago quarter. Primarily as a result of additional sales and marketing expenses in our roadway and vehicle sensor segments. The Company reported operating income of $1.2 million for the current quarter, compared to operating income of $1.1 million in the prior year quarter.

Net income for the fourth quarter was $807,000 or $0.02 per fully diluted share compared to net income of $8 million or $0.23 per fully diluted share for the prior year quarter. The prior year quarter included a $7 million tax benefit as the result of release of all of our remaining reserves on our deferred tax assets. No such benefit was recorded in the current quarter because all reserves were released from our tax assets in the prior year. We ended the quarter with approximately $10.4 million in cash and generated $1.5 million in positive cash flow from our operations, and $6.5 million for our fiscal year-ended March 31, 2010. Additionally we have roughly $15 million in deferred tax assets which can be used to offset future taxes payable.

We've not yet drawn upon our $12 million line of credit with our senior letter -- lender and we've reduce our long-term debt by approximately $2 million since March 2009. We plan to focus on aggressive cash collections and asset 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.

In general this was a year of Iteris maintaining profitability while investing prudently in sales and marketing and R&D in a very challenging environment. And with that backdrop, I'm proud of our achievements. We produced another profitable quarter, with sequential revenue and operating income growth. In addition, our sensor products experienced double digit year over year growth. These results indicate to us that the demand for our products is improving although we continue to face tight state and municipal budgets. With that in mind, we continued reducing cost of goods enabling to improve our gross profit margin with the goal of not just maintaining, but also expanding, our profitability.

Additionally, to bolster our competitive position, we've executed several strategic initiatives. These include a strategic marketing agreements with Meritor WABCO to expand our North American active safety sales channels. A strategic technical and marketing agreement with Siemens, focused on enhanced video detection and traffic controller interface, and execution of two key European OEM contract extensions providing lane departure warning products to expand our international presence. We also continue to strengthen our balance sheet expanding our cash position to over $10 million.

I would like to comment on each revenue stream and address key drivers that support our expected growth. Roadway Sensors net sales grew by 13% year over year and 16% sequentially. In addition, gross margin expanded as a result of product mix and reduction in cost of goods. We are happy to see the take-up rate on new products. Nearly 30% of the products we sold during the quarter were introduced to market over the last 24 months, and we expect our products to continue attract existing and new customers. We are now offering a newly designed detection product called Pico, which is a specifically targeted for the international market. This product is in response to the standards and functional requirements of that market. We believe Pico represents a great value and we are experiencing 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. We believe the addressable market for Iteris internationally is similar to that of North America in total. Two key drivers for this revenue stream in the fiscal year we just entered are expected to be A, increasing traction in domestic markets, as we expand our core and addressable market through offering expansion of our product portfolio, and B, traction international sales primarily through offering key and innovative products suitable for that market and forging partnerships to expand the distribution channels internationally.

In the vehicle sensors market, we received increase orders and grew 17% year over year and 32% sequentially. Two key drivers are expected to help this revenue stream grow in the future. A, 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 warnings for all new model commercial trucks beginning year 2013, and we're preparing to respond to this demand. And B, expansion of our active safety portfolio. We have completed the design of our third generation platform 3G, which offers extensive processing power capable of multi-functions. This platform is now enabling us to have both lane departure warning as well as our vision-based forward collision warning on the same processor. We are receiving favorable reaction from the commercial truck market on this offering. In fact, we have already sold samples to truck OEMs and anticipate a pent up demand.

In this revenue stream, we have seen a sizable production rate and a gradual increase in orders particularly with the OEMs. Also our SafetyDirect software has continued to attract new test fleets and we anticipate the current test fleets will achieve favorable results, based on early feedback. In addition, through our new partnership with Meritor WABCO, we expect a significant penetration into fleets interested in our SafetyDirect software tool, which in turn would require installation of lane departure warning system.

In transportation systems, sales were flat sequentially and decreased 29% year over year. Primarily due to an unusually high subcontract content on certain key projects in the prior year quarter. This segment of our business is the most challenging at present as it relies on projects funded by state and municipalities and across the country these entities are facing very tight budgets. Demand has not gone away. Traffic continues to get worse. And ultimately, this period of economic uncertainty and reduced spending is creating pent up demand. Our technology remains at the forefront of the industry. We are focused on expanding our lead through focus niche product and service development, so that as the spending resumes, and it will, we will maximize our benefit.

At the end of the year we have $28 million in total backlog, which included $5.5 million added during the last quarter. Key drivers in this revenue stream are expected to include, A, our focus on large contracts, or as we refer to them, mega projects. Typically, mega projects are several million dollars contracts. We are tracking several such contracts and expect to expand our revenues as a result. B, we anticipate progress in the development of new niche technical markets. We are developing key integration software tools which we believe will position us for several large upcoming contracts. In addition, we are developing a specific transit signal priority tool, which we are now marketing nationwide and expect a favorable market reaction. And C, expanded investment in sales and marketing domestically and internationally. During our fourth fiscal quarter we added two executives in California and Texas, and plan to further invest in this area. We expect this investment to help us in the expansion of our offerings during this fiscal year.

As I have indicated in the past, we believe the overall transportation funding will continue to increase. And expect Iteris to be a beneficiary of that. A key component will be the Federal highway bill, which is up for renewal and is expected to be over $500 billion for the next six years, or approximately twice the size of the previous bill. Although this bill is moving slowly, and has already faced delays, there have been a few extensions of the existing bill to the current level of expenditure. We are watching it closely as it goes through Congress, and we believe a bill will pass and will ultimately benefit Iteris. In addition there are a variety of other transportation related funds flowing through our market, including various state and local agency bonds, tax hikes focused on transit and transportation infrastructure improvements.

In summary, one, we are pleased with achieving overall sequential revenue and operating income growth, achieving profitability for eighteen consecutive quarters, and improved margins. Our 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, despite the current macro economic conditions.

Two, we believe that we are producing the right products as demanded by the market which we expect would help us to expand our market share. And increase the size of our addressable market. The key drivers expected for roadway sensors are expanded traction domestically and international market. In vehicle sensors, we expect a favorable market reaction to our new forward collision warning product and our new third generation platform. In addition we expect a high demand for lane departure warning in response to the European Union mandate. And for transportation systems, we expect our software base integration tool will provide us with a favorable position in the system integration market and traction in our transit signal priority offering in mega projects.

Three, we anticipate that the level of funding will significantly expand for our industry in the coming years. We also expect 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 and strategy is to expand both top line and bottom line growth through prudent investments in innovations 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 that we are currently benefiting from this strategy, and we plan to continue to subscribe to this important initiative. From reduction in cost of goods for our products, to expenses related to being a public Company, to better inventory management and labor efficiency, just to name a few.

Five, we are executing on your strategic plan in various fronts such as forging strategic relationships. Going forward, we plan to continue focusing on the execution of our strategic plan including partnerships, an acquisition of QIP, and companies that we believe can help us accelerate our growth.

Six, due to the current macro economic conditions we are not providing specific guidance. However, I'm optimistic about the traffic management market and Iteris' position in the market in the coming year and believe our prudent investment in sales and marketing and R&D as well as continued execution on various initiatives and our strategic plan will help us to grow and expand in key market areas both domestically and internationally.

This concludes my remarks. We'll be delighted to respond to questions and comments. Back to you, Stacy

(Operator Instructions) Your first question comes from the line of Jeff Van Sinderen with B. Riley & Company. Please proceed.

Hi gentlemen, this is actually Sarkis filling in for Jeff, how are you doing today?

Wonderful. Thank you, sir, for sitting in.

First, you know, I also want to say congratulations on the quarter before I get into my question. Now, relevant to the truck OEMs in Europe, we know that you're aligned with MAN and Kenya, are you working with others? And can you tell us a little more about the 2013 mandate? And how do you feel about your business prospects for that?

Yes. Thank you for the question. We announced, of course, in the last quarter our expanded execution of contracts with both Scania and MAN, and yes, we are in discussion with several other OEMs to expand our contract which, for competitive purposes, I don't mention them.

With regards to the 2013 mandate, the European Union is asking all the OEMs on all the new models for the commercial trucks, to equip them with key safety features. And we do believe that lane departure warning is going to be one of those features. There are variety of discussions and deliberation of the details and the standards and the specification of that, but we believe that before the end of this calendar year, many of those would solidify and there is a pent up demand on this in a significantly higher magnitude that we're experiencing now.

So what we are doing now is position ourselves in really two major components. One, to be able to provide the product, the lane departure warning, in a high volume as the demand is getting a lot higher, and B, focusing on the appropriate reduction cost of goods so that we could offer that at a proper price to be competitive in that market.

Okay. Great. And on the Meritor WABCO partnership with SafetyDirect. Can you expand on that a little bit and what it means for Iteris?

Absolutely. Meritor WABCO is a major player in the trucking fleets in that, they have sophisticated software and braking system. They have a software called Smart Track that they also refer to it as the on-guard active safety system. Combining that with or SafetyDirect software, it really empowers the fleet managers to bring in information that is really important to the fleet managers, and these information could be anything about the safety, via our lane departure warnings, to other types of information that may be related to engines and braking systems and what have you. But the fleet managers are very much interested in those types of information and they can identify risky driver behaviors and really provide drivers with training that the fleet managers deem appropriate to reinforce safety driving practices and so on.

Meritor WABCO has a large sales and marketing group in North America, so this relationship really nicely taps in in that sales channel. And so we expect our sales regarding SafetyDirect, which in turn would impact the lane departure warning to increase in the upcoming quarters.

Nice. And on the roadway sensors business, what are the prospects going forward with the new products you've introduced? And maybe what are your plans for 2011?

Yes. The products that we have introduced to market are really two-fold. Those domestically the latest product on those are VersiCam wireless, which we believe that there's a pent up demand for that, particularly for agencies that cannot really afford a challenging times like now to put in the hardwire communication, if you will. So that wireless communication really helps them to much more economically detect at intersections. In addition we use that for construction zones, so that's the latest domestically plus others we've introduced over the last twelve months, or rather twenty-four months I indicated in my earlier remarks, over 30% of our sales in the fourth quarter was attributed to the new products that we've introduced over the last twenty-four months.

As far as international, a key product that we introduced a quarter ago is Pico. Pico is really designed in response to the demand of international market for the value that they're looking at and for the standards and configuration that they're interested in. That is going to be our flagship product, if you will, for the roadway sensors for many quarters to come and we have expanded those sales force in Europe and elsewhere to really take advantage of this. We are in discussion for partnership with various system integrators around the world, and so I feel pretty optimistic for the pent up demand for Pico in the international market during the fiscal year '11.

Great. And can you help us understand a little more about the funding sources for the traffic management and transportation project in light of the state and local economies?

That's a great question. You know, overall many of the municipalities and the state agencies and of course, feds, are challenged with the funding. That's a fact, but what is encouraging, however, is that the highway bill that I mentioned earlier in my remarks would really provide the opportunity in the transportation infrastructure to enjoy almost twice as much as the last six years. So this is to the tune of about $500 billion, although at the moment Congress is dealing with a lot of other important challenges and so that particular bill is delayed, and it may be delayed for another six to twelve months perhaps. But they also have decided, though to extend the current bill for the expenditure at the level that we currently have.

What is happening nationwide, though, many state and local municipalities, seeing the deterioration of the infrastructure, they also see the benefits of application of technology in improved infrastructure, primarily in traffic management, that has a much higher rate of return, so they're coming up with ways of creative funding if you will. As an example, Los Angeles County here passed last November what is called a Measure R, which provides about $40 billion worth of improvements dedicated to transportation and transit improvement. So, we enjoyed that, and that was $0.005 tax hike. Virginia DOT as an example, passed something similar that over the next six years provides $2.2 billion worth of funding.

There are various measures, bonds, public/private partnerships, so there are other funds flowing that really makes me to be quite optimistic going forward in the way of the funds flowing to transportation and traffic management despite the challenges that we are experiencing.

Okay. Great. And just to kind of go back to the international market. So how do you feel about the market opportunity there and how do you see your product fitting into that market? I know you mentioned Pico, but is there anything else that you'd want to discuss or mention?

Sure. I could expand on vehicle sensors and transportation systems. Regarding vehicle sensors, as I indicated, the mandate is upon us. But we also have this new feature, which is vision-based, forward collision warning that we are offering to market. We have every intention of offering that to the international market, and we believe that it should have a favorable reaction.

In Transportation Systems, about a year ago we started penetrating into international market. We are currently doing some work in Middle East, and we would be considering very carefully expanding that beyond Middle East. So fiscal year '11 for us would be an interesting fiscal year in that I would expect more penetration and sales internationally than in the past.

Great, gentlemen, and good luck. Thank you.

Thank you for all your questions.

(Operator Instructions) Your next question comes from the line of Joel Achramowicz with Blaylock Robert. Please proceed.

Thank you. Hi, Abbas. Hi, James.

Good afternoon, sir. Thank you for joining us.

It's my pleasure. It's been a while, I really plugged into what you're doing, but I constantly watch your progress and as always obviously continuing, you and Jim continuing to manage the operating model very tightly. And the balance sheet remains as solid as it's been in the past. Obviously the key here is growth and your ability to sustain it. But, any -- do you have any thoughts, long-term, on what your model, your long-term and maybe mid-term objectives might be on a modelling basis? Operating modelling basis?

Absolutely. Joel, it is our strategy to really grow organically as well as acquisition as necessary. But I would envision that the serious state model for us would be to have the top line growth 20% year-over-year and the bottom line to get it in excess of 10% as a percentage of sales. You know, ideally 15%. And we believe that it is do-able. We have done a lot of activities and positioning to really get the infrastructure and our labor force prepared for that, you know. But you look at, for example, our operating income this quarter, what we are achieving a little bit more than what we did a year ago, and a year ago we had the close to couple million dollars more in sales. So with that kind of approach being nimble and being quite efficient, I really believe that the dynamics of the operating results should be quite favorable to us going forward.

Okay. Do you see -- and obviously you don't have any debt -- do you see any opportunities for acquisitions? I mean, obviously they'd have to be smaller ones. But are you looking for inorganic opportunities?

You know, absolutely. You know, we mentioned earlier that we have a little bit over $10 million worth of cash, you know -- ironically, when I look at the last three years, we have generated more than $20 million worth of cash from operations. And so what we have done is that we had a long-term debt that we have reduced it now to below $5 million. We have a pretty good line of credit, which in that line, by the way, we have an arrangement with our banker to apply some of that to acquisition if need to.

So we have been looking at the variety of opportunities in a way of synergistic acquisitions in our core and adjacent markets, and I actually feel pretty confident that if the right company presents itself we would try to do an acquisition. And it may actually be not necessarily a small, mid-size, and maybe a little bit larger, of course, that's a relative term. We have to be careful. You know, we are trying to be quite prudent about this. You know, I've been, Joel, on both ends of this acquisition situation. Sometimes I feel that, you know, the word synergy could be, could be over played a little bit and the cost of integration underestimated. So we try to be quite prudent in a way that we would do the acquisition, but it is very important in our minds that in order for us to grow in an accelerated fashion the way we want to, we can't do it all organically. And that there are some key IPs and key areas geographically, and otherwise that is needed for us to exercise a prudent acquisition.

Okay. Lastly, Abbas, this is more on a strategic than a technological perspective. I wanted to get your -- I've been doing a lot of work with companies in the, what I call the remote RFID, or wireless application remote protocol-type transmission, and I've been conceiving the prospect of installing devices on cars and vehicles that would be able to communicate both with side road based transceivers as well as perhaps with cellular and the new WiMAX Metropolitan transceivers for more granular traffic and commuting, you know, automation and management. Is that something that you're seeing emerging as something that you might be able to play in?

Absolutely. That's an excellent question, and the answer is yes. In fact, we have what we call a Tiger Team in-house that is focusing on an initiative just to address that. And, in fact, we are working with a particular company that we have a contract for feds addressing some of those issues, and I would love to be able to share a lot more details but for competitive purposes, I really shouldn't. But that is, you're right on the mark, Joel, that is the market trend. We call that IntelliDrive. There's a name for that, that DOT has coined more than a year ago, and it is very important. Of course, the application of wireless technology and the smart phones and what have you, it is very much in a full penetration in our industry, and we are closely looking at that and using it and doing reconnaissance and exploration of various R&D activities to be able to position ourselves to offer the right product to market.

In the meantime, by the way, we are partnering with various wireless companies in a way of various products that we're offering, and this is roadway and in vehicle. So in short, absolutely yes.

You know, I'm very interested in that. Abbas, I'm going to be down there sometime in the South Bay, and I look forward to seeing -- it's been a while, but I look forward to plugging with you and Jim maybe sometime in the next couple of weeks.

Well thank you, sir. And I appreciate you joining us on this call.

Good luck going forward. Bye, bye

Thank you, sir.

(Operator Instructions) And at this time, I'd like to turn the presentation back to Mr. Mohaddes for closing remarks.

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

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.