Iteris Inc (ITI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter Iteris, Inc. earnings conference call. My name is Quiana and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session.

(Operator instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jim Miele. You may proceed.

Thank you, Operator. Good afternoon and welcome to the Iteris first quarter 2011 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 2011 first 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'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 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 first quarter ended March 31, 2011, our net sales and contract revenues increased a little more than 7% to $15.7 million, compared to $14.6 million in the same quarter of the prior year. The overall increase was mainly a result of a 31% increase in roadway sensors net sales and a 57% increase in vehicle sensors net sales. These increases were offset by a 19% decline in transportation systems contract revenues. The decline was mainly due to the acceleration and timing of certain contracts in the prior year period, which resulted in an unusually high amount of sub-consulting revenues. 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 increased to 44.7% compared to 38.1% in the prior year quarter. The increase in margins was primarily a result of sales mix more weighted towards the roadway and vehicles sensors product sales, which produce higher gross margins as well as lower manufacturing and material costs.

Current quarter operating expenses increased 6.8% to $ 5.6 million compared to $5.3 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 $1.4 million for the quarter compared to operating income of $321,000 in the prior year quarter. Net income for the first quarter was $797,000 or $0.02 per fully diluted share, compared to net income of $144,000 or $0.00 per fully diluted share in the prior year quarter.

We ended this quarter with approximately $11.7 million in cash and generated $1.9 million in positive cash from our operations. Additionally, we have roughly $14.3 million remaining in deferred tax assets which can be used to offset future taxes payable. We have not yet drawn on our $12 million line of credit with our senior lender and we continue to reduce our long-term debt. Now I'd like to turn the call over to Abbas and we'll further discuss the quarter and our strategy in greater detail. Abbas?

Thanks, Jim. We had a good quarter and I'm particularly encouraged by the year-over-year growth of our products, revenue, and operating income. These results indicate to us that the demand for our products should be improving and we are beginning to see growth in key markets despite the continued tightness of the state and municipal budgets.

Many states and local agencies are relying on various sources of funds such as a specific infrastructure bond measures and tax hikes dedicated to transportation projects to use for overall traffic management improvement projects.

We reduced cost of goods and deployed various other efficiency measures enabling us to improve our gross profit margin as well as our overall profitability. Additionally, we are tenaciously executing several initiatives, including strategic marketing agreements, key product developments, and expanding market penetration in specific geographic areas.

Our balance sheet also remains strong, with our cash position increasing to over $11 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 31% year-over-year. In addition, gross margin expanded as a result of product mix and reduction in cost of goods.

I should point out the cost of goods reduction is one of our key innovative and comprehensive initiatives. We look at a variety of variables from our approach to product development and design to our material costs and to contract manufacturing. And we have experienced the positive impact of our efforts on all of our product costs.

Additionally, we are happy to see the positive take-up rate on our new products. Nearly 25% of the products we sold during the quarter were introduced to market over the last two years and we expect our product portfolio to attract existing and new customers.

Some of the most recent new product offerings have been well received by the market, specifically Pico, VersiCam Wireless, and Abacus. If you recall, Pico is designed to respond to the standards and functional requirements of international market.

VersiCam Wireless helps the agencies looking for efficient and alternative communication and in some cases temporary detection, such as construction zones. And Abacus helps both domestic and international agencies to leverage their current surveillance camera systems and turn them into detection and incident management systems.

We have forced several agreements to expand their strengths of our offerings with various partners, including Siemans, ATS, and McCane. In addition, for international markets, we are in partnership discussions with key system integrators and distribution channels which we believe will allow us to better market access.

Two key drivers for this revenue stream in the upcoming few quarters are expected to be, A, increasing traction in domestic markets as we expand our core and addressable market through the depth and breadth of our product portfolio, B, traction international markets 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 grew 67% year-over-year. This revenue stream has seen a stabilizing production rate and a gradual increase in orders, particularly with our OEM customers. Through our recently announced agreement with Meritor WABCO, we expect increased penetration into large number of fleets interested in our safety direct software tool, which in turn will require installation of lane departure warning system. We are currently working closely with Meritor WABCO to finalize the customized technical sales and marketing approach in preparation of shipping starting next quarter.

Finally, our forward collision warning system has been well-received by the market and we are starting to receive orders from customers. There are two key drivers we expect helping this revenue stream grow. A, the European Union mandate of key active safety features, which we believe will include the lane departure feature for all new model commercial trucks beginning year 2013 and subsequently all new commercial trucks by year 2015. And we are preparing to respond to this expected demand.

For example, earlier this week we announced a five year extension of our contract with DAF to continue providing lane departure warning technology. This is the third OEM from whom we have received such an extension, which would help us to sustain our leadership in this market.

And B, expansion of our active safety portfolio. We have completed the design of our third generation platform, or 3G, which offers extensive processing power capable of multifunctions such as inclusion of forward collision warning, pedestrian detection, in addition to the lane departure warning. We began shipping the 3G platform this quarter.

In transportation systems, sales decreased 19% year-over-year, primarily due to unusually high subcontract content related to the acceleration of certain key projects in the prior year quarter. This segment of our business is the most challenging at present as it largely relies on projects funded by states and municipalities and across the country, these entities are facing very tight budgets.

We believe that the demand has not gone away. Traffic continues to get worse and ultimately I believe that this period of economic uncertainty and reduced spending is creating pent-up demand. Our technology remains at the forefront of the industry.

We plan to focus on expanding our relationship or rather expanding our leadership position through niche product and service development so that as the spending resumes, and I believe it will, we should maximize our market potential.

At the end of the quarter, we have $27.5 million in total backlog, including $5 million of new signed contracts during the current quarter. Our pipeline remains strong, in particular I believe larger design and integration contracts leads are expanding.

Key drivers in this revenue stream are expected in include, A, our focus on large opportunities including design build contracts which were typically several million dollars contracts. We are tracking several such projects and expect to expand our revenues in this area 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. We expect this investment to help us in the expansion of our offerings going forward.

We believe the overall transportation funding will continue to increase and believe that Iteris is strategically positioned with best-in-class technology to benefit from it. As I have indicated in the past, a key component will be 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 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 believe the bill will pass, which would ultimately benefit Iteris by funding incremental growth.

As I mentioned, there are a variety of other transportation related funds flowing to our market, including state and local agency bonds, tax hikes focused on transit and transportation infrastructure improvements. As we announced a couple of weeks ago, we received a $2 million contract in Los Angeles County to manage a major infrastructure program resulted from Measure R, which is a tax hike of $0.05 in Los Angeles County dedicated to transportation projects.

In summary, we are pleased with achieving overall revenue and operating income growth and improved margins. We believe our commitment to R&D and innovation, operational excellence, and expected demand for our expertise and technology should help us to grow and should put us in an even better competitive position going forward, despite the continued macroeconomic conditions.

We believe that 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. We expect to be able to take advantage of highway build as well as expected dedicated transportation funds through various bonds, dedicated sales tax, and gas tax in the coming quarters.

We are executing on our strategic plan in various fronts, such as forging a strategic relationships, including partnerships and continue to review possible acquisitions of key IP and companies that we believe can help us accelerate our growth.

I'm optimistic about the traffic management market and Iteris' position in the market in the upcoming quarters and believe our investments in sales and marketing and R&D, as well as continued execution of various initiatives and our strategic plan should help us to grow both in topline and bottom line domestically and internationally in a sustainable fashion. This concludes my remarks. We will be delighted to respond to questions and comments.

(Operator instructions)

Our first question comes from the line of [Nicholas Heymann] of Sidoti & Company. You may proceed.

Hey, guys. Good afternoon.

Good afternoon, Mr. Heymann.

My first question is regarding your margins. I know you guys said you were really focused on reducing cost of goods sold and also with the product mix with such high net sales in Q1. My question is, are these levels sustainable going forward and what basically are your projections for 2010 in terms of margins?

Yes, the margins we have been quite fortunate, Mr. Heymann, over the last several quarters to sustain it and in some cases improving it. This particular quarter we had a higher mix of the products as opposed to the contracts, which traditionally the product side of the house would generate higher margin.

And to the degree that we are able to sustain our operational excellence initiatives, which we look at a variety of avenues, everything from the cost of development, design, contract manufacturing. We recently, about a year ago, switched one of our contract manufacturing agreements and we are getting high quality and a better pricing on key board development for us.

To the degree that we are able to continue activities, including cost of materials, I believe that they could sustain a high margin. I wouldn't necessarily sign up to such a significant improvement year-over-year of the margin that we just announced for this quarter, but I could tell you this much, that this is an area that we are very sensitive about. We are very careful that when it comes to price wars and competitive activities, we really take a very careful look at the, at our price and margins. It's quite important to us. It's one of our key initiatives to retain a high margin as we go forward. Jim, please feel free to add if you wish.

I think that sums up my attitude about our margins as well.

Okay, thank you. I just have one more question about the OEM contracts. I know you guys have extended three of them, like you just said. How many other OEMs are you currently in talks with, and basically, can you give us a little bit of an update on how that's progressing?

Absolutely. Excellent question. We have, let's see, six or seven major OEMs and this is essentially the majority of the OEMs, large OEMs in the truck business. We are quite fortunate that we have received the three extensions. We are in discussion with all the rest of them and expect to continue executing similar contracts as we go forward and I'm sure you appreciate this is highly competitive market, particularly as the new mandates are coming up for year 2013 and 2015 for the new models and all the commercial vehicles respectively to be adding the active safety features, including lane departure warning.

So while we would be competing, we really like our position. We, at the moment, have the majority of the market share in this market and are working extremely hard. In fact, some of our staff are in discussion as we speak with some of the OEMs that we are trying to get additional extensions.

Okay, great. Thanks, guys.

Appreciate the questions, sir.

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

Good afternoon. I wonder, on the DAF agreement, that's the agreement, it looks like goes out five years and I'm just wondering what went into their decision-making process to go out that far and commit through the 2015 mandate? And then also as sort of a follow-up to that maybe you can just talk a little bit about what you're seeing in terms of the competitive landscape in the truck market. It seems like you're making some pretty good headway in locking up the OEMs.

Excellent questions, Mr. Van Sinderen. As far as the DAF, we have been in discussion with them for several months and from my point of view, there are two key drivers that really helped us to get this contract. The level of support that we have been providing to DAF has been tremendous. We have been very responsive.

And then as far as the quality of the product and how it fits their specifications, we have been working very hard to meet and exceed their expectations in that regard. And we have been in discussion and we were quite fortunate to continue that extension.

The competitive landscape is getting broader in the truck market. What happens is that by the time we get to 2013 and 2015, the potential is that we expect somewhere between 10 to 20 times the current level, level of products. We demand it. And what that does is really waking up some new competitors, if you will, and that includes some of the larger suppliers and manufacturers of these types of features.

At the moment we are aware of at least three, possibly four competitors that are beginning to offer their products. We certainly take them very seriously. At the same time, we are enjoying over 2 billion miles of experience with our products. We have been at it for a long time and already established a relationship with most of the large OEMs.

You see, Mr. Van Sinderen, to really get into these large OEMs, it takes a long time to go through a process with such a high scrutiny of testing and once you get onto the platform then you are there for several years, so for some of these manufacturers to switch, there has to be really a substantial reason. But we are certainly taking the competition quite seriously and doing everything we can to prepare, both in terms of the superiority in terms of product and functions and also in inevitable pricing that we need to be at for high volumes. And we are preparing on both fronts.

Okay. And then the other OEMs that you're in discussions with, you feel like you're well positioned to win some business from them?

We certainly feel that way. It is not an easy task. It's a long process. Some of them have already started preparing for RFPs or discussion with us. Some of them it may take a few quarters before they get ready. You know they work on different schedules, but we are in discussion with every one of them and preparing to respond to demand and that would include, not only from a technical levels, but also support, which is very important to all OEMs and of course very importantly, the pricing when you get to the high volume.

Okay. And then maybe you can expand a little bit on the market reaction to some of your new products and then also, as a sort of another part of that, maybe you could talk a little bit about the international markets and how some of your newer products are helping you make inroads there?

Excellent. Let me address the vacant sensors and new products, since we are just finishing that subject. Two major activities are taking place. One, the development and manufacturing, our new platform, as we refer to it, the third generation. This is being extremely well-received by the market for several reasons, mostly technical in that we could now have multifeatures on the same platform so that the fleets don't have to really add the multiboxes.

So we could have now a smaller board and have features, including lane departure warning, and our forward collision warning and other features such as blind spot or pedestrian detection or what have you. We have been working very closely with Texas Instruments and we adopted their Da Vinci processor, which, by the way, TI has asked us to be on the advisory group to help them develop the next generation of Da Vinci. This relationship has been helping us tremendously.

Then, as far as software development, the safety direct, and this is the relationship that we have with the Meritor WABCO, which is going extremely well. We anticipate to penetrate into a large number of fleets starting next quarter to sell our safety direct, which allow the dispatcher and fleet managers to see the characteristics and behavior of each truck at all times related to safety issues.

Joe is driving on I-80 in Iowa and gets a little bit drowsy at midnight and Jane in California could see that within the last 10 minutes Joe is departing out of his lane and he calls him up and say, "Joe, pull over." And this could prevent a major accident. Many of the fleet managers are getting quite excited about having access to that type of safety information, preventive safety information.

Moving on to the other products, let me start by Pico, which we designed it specifically to address detection in the international market. This is being tested in several different areas around the world and we are beginning to see orders on Pico. It is designed to respond to a specification for international market and it is priced appropriately to respond to that market as well.

A few other and newer products, VersiCam Wireless is being tested and quite attracted by our distribution channels and customers, Edge Connect and others. I feel quite optimistic about the future going forward about the expectation of the penetration of these new products into the market and truly believe that we made a good decision a couple of years ago to really invest and expand our investment as a percentage of sales in R&D to really position us to have these new products that are demanded by the market and we believe that as the market and microeconomics improve, we are well positioned to take advantage of the market.

So -- it sounds like the market for your products is expanding. Is that a fair statement at this point?

It certainly is a fair statement. We are seeing it now. We are selling more. This last quarter we finished was a good testament to that. We started this quarter that we're in now for the detection at the good rate of backlog and I'm looking forward to have another good quarter.

Okay, great. And then looking at Q2, do you think that we -- is it reasonable to think that you should have year-over-year improvement in Q2 this year versus last year?

You know, I don't have the numbers of the last year Q at the moment, but I could get back to you once we figure out the exact numbers. Jim, do you have the numbers, what we did last year Q2?

Well, it was in the, it was in the high $14 million range.

I should it here. Yes, I -

In terms of revenue.

My expectation is that what we are doing this Q1, the strength should continue. You know, we always have Q2 on the contract consultant side of the business, a lot of vacationers and typically the business slows down just a little bit, but overall I feel optimistic about our second quarter. I don't see any specific areas that I could point to suggesting that we should be experiencing something different.

Okay, great to hear. Thanks very much and good luck.

Thank you, sir. I appreciate the questions.

(Operator instructions)

Our next question comes from the line of William Myers of Miller Asset Management. You may proceed.

Hi. Thank you. I'm interested in your intellectual property situation. I know you have some great products and I'm wondering whether licensing intellectual property for them is a major expense for you, whether you license your technology to others, and how does your own intellectual property figure in this competition for selling the products in Europe? Thanks.

Thank you, Mr. Myers. Yes, it -- barrier to entry is quite important and our IP, we protect them very well in various ways. You may know that the lane departure warning for the passenger car is licensed to our partner, a French company called VALU. They are one of the top ten largest suppliers and from time to time we may be deciding to provide the license.

In many cases we have patented our technologies. We have a long list of those patents. We -- our expenditure in IP is not that significant. It really is not a material expense when you look at our expenditure over the last quarter or two. But it is very important to protect the IP that we have.

I could perhaps give you one example. In case of the video detection, we have been at this for about ten years and perfected the technology. It is very difficult to enter in this arena. Just in the last perhaps three years or so, the North American market we have a handful of competitors that has been relatively a steady, not a whole lot of new competitors, with some exceptions, maybe one or two. But overall I, at the risk of repeating, I would restate that we take our IPs quite seriously. It's a very important part of our assets.

Okay, thanks.

Thank you, sir.

With no further questions, I would now like to turn the conference over to Mr. Mohaddes for final remarks.

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

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