Iteris Inc (ITI) 2011 Q2 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today conference call to discuss Iteris' financial results for its second fiscal quarter ended September 30, 2010. Joining us today are Iteris' President & CEO, Mr. Abbas Mohaddes; and the Company's CFO, Mr. Jim Miele. Following their remarks, we will open the call for your questions.

(Operator Instructions)

I would also like to remind everyone that a webcast replay of today's call will be available via the investor's section of the Company's website at www.iteris.com until November 4, 2010.

Now, I would now like to turn the call over to Mr. Mohaddes. Sir, please proceed.

Thank you, Melanie, and good afternoon, everyone. Thank you for joining us today to discuss our recent results. As you saw at the close of the market today, we issued a press release announcing our financial results for the second fiscal quarter of 2011. We have continued to execute upon the plan I have broadcast on past calls of investing in our products and marketing, while maintaining profitability and growing cash flow.

While sales from our sensors products are continuing to gain momentum, we are disappointed by the decrease in revenues reported by Transportation Systems, and I will discuss our plan to address this later in the call.

Both Roadway and Vehicle Sensors continued to grow year-over-year primarily due to the expansion of our R&D efforts, and increased sales and marketing activities. We have also experienced more orders from truck OEMs for our vehicle safety products. Earlier this week, we attended the American Trucking Association annual meeting and exhibit, and launched our Safety Direct Software product, jointly with our partner, Meritor WABCO.

I'm happy to report this product was well received by the industry. While the second quarter's Transportation Systems revenue decreased, we expect this segment to contribute to our growth over the coming periods. This market is showing signs of increasing traction, as evidenced by new allocated federal and local funds for transportation projects, resulting in expanded request for proposals.

We plan to improve Transportation Systems revenue by expanding our sales and marketing efforts, as well as execution of new strategic initiatives. Our balance sheet remains healthy and provides us with the stability we need to execute on our broader strategic objectives.

Now before I comment further, I would love to turn the call over to our CFO, Jim Miele, who will take us through the details of our financial results for the period. Afterwards, I will return to discuss some more of the highlights of the quarter, and how we plan to continue to build shareholders value in 2011. Finally, we will open the call for your questions.

Jim?

Thanks, Abbas, and good afternoon, everyone, and thank you again for joining us. For the second quarter ended September 30, 2010, our net sales and contract revenues decreased approximately 5% to $14.1 million, compared to $14.9 million in the same quarter of the prior year.

The overall decrease was mainly due to a decline in Transportation Systems contract revenues as Abbas discussed, partially offset by a slight increase in sales of our sensor products. As there are different characteristics affecting each of our revenue streams, and different attributes affecting our quarterly results, Abbas will provide more detail regarding net sales and contract revenues later in his comments.

Gross margins for the quarter remained healthy at 44.7%, primarily due to a sales mix weighted more towards higher gross margin products, as well as lower manufacturing costs in our Vehicle Sensor segment. Second quarter operating expenses were comparable to the year ago quarter, and slightly down from the prior quarter. The decrease from the prior quarter was mainly a result of the absence of audit and other related fees recorded in the first quarter.

The Company reported Q2 operating income of $953,000, and net income of $542,000 or $0.02 per fully diluted share. We ended the quarter with approximately $12.3 million in cash, up from $10.4 million at the end of fiscal 2010, and generated over $3 million in positive cash flow from operations for the six-month period ended September 30, 2010.

Additionally, we have roughly $13.9 million in remaining 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, which now stands at $4.4 million.

This concludes my comments on the financials. Now I like to turn the call back over to Abbas, who will further discuss the quarter and our strategy in greater detail. Abbas?

Jim, thank you very much. We're tenaciously executing several initiatives, including strategic marketing agreements, key product developments, and expanding market penetration in specific geographic areas. In addition, we continued to review possible acquisitions of key IP and companies we believe can help us accelerate our growth.

I would love to comment on each revenue stream and address key drivers that support our expected growth. In Transportation Systems, our most challenging segment presently, sales decreased 18% year-over-year, as we rely largely on projects funded by state and municipalities. And across the country, these entities continue to face tight budgets. We believe that demand has not gone away. Traffic continues to get worse, and ultimately I believe this period of economic uncertainty and reduced spending is creating pent-up demand. And our technology remains at the forefront of the industry.

We plan to focus on expanding our leadership position through niche products and service developments, so that as the spending expands, and I believe it will, we should be able to maximize our market potential. I should add that we believe the market is gaining traction in key niche areas such as design builds, system integration, and transit projects. We expect to directly benefit from this traction by expanding our sales and marketing directed in these specific areas. In summary, I feel optimistic about our revenue growth in this segment in the coming quarters.

At the end of the quarter, we had $26.3 million in total backlog, including $5.2 million of new signed contracts during the quarter versus $5 million of new signed contracts in the previous quarter. Our pipeline remains strong, in particular, as I already mentioned, we believe larger design build and integration, as well as transit contract leads are expanding.

Key drivers in this revenue stream are expected to include our focus on large opportunities, design build contracts, which are typically several million dollars. We are tracking several such projects, and expect to expand the revenues in this area as a result. We anticipate progress in the development of new niche technical markets. We are developing a specific Transit Signal Priority tool, which we are now marketing nationwide, and expect a favorable market reaction.

In addition, we are developing key software tools for arterial data collection and performance measurement. Our initial trials with key customers have been positive, and we're expanding additional demonstration sites. And 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. There are a variety of transportation related funds flowing to our market, including the Federal Highway Bill expected to be over $500 billion for the next six years, various stimulus funds, infrastructure funds, such as the recent $50 billion announced by the President, state local agency bonds, tax hikes, focus on transit and transportation infrastructure improvements.

We are monitoring progress and working closely with many of the agencies to benefit from these funds through the request for proposals process.

The Vehicle Sensors segment continued to grow, increasing 17% year-over-year. This revenue stream has seen a stabilizing production rate and a gradual increase in orders, particularly with our OEM customers. I'm also pleased that we have been able to sign long-term contracts with key OEMs, such as a five-year contract with DAF, which we announced in Q2.

We launched our Safety Direct software this week with our partner Meritor WABCO. We believe this partnership will increase penetration into a large number of fleets interested in Safety Direct. We expect the revenues from this partnership will begin in the current quarter, Q3. Finally, our Forward Collision Warning system demonstrations and trials have been well received by the market, and we expect to begin shipping product in North America during our fourth fiscal quarter.

There are three key drivers we expect to help this revenue stream grow. A, the European Union mandate of key active safety features, which we believe will include the Lane Departure Warning feature for all new commercial truck models, beginning in 2013, and subsequently all-new commercial trucks by year 2015. We are preparing to respond to this expected demand.

The market penetration of our Safety Direct software. We are enthused by the market's reaction to this revolutionary software, and expect to see its contribution to our revenue growth starting with the third quarter.

And see expansion of our active safety portfolio. We have completed the design of our third generation platform 3G, which offers extensive processing power, capable of multiple functions such as inclusion of forward collision warning in addition to the Lane Departure Warning system. Our 3G platform is already being shipped in North America, and we are selling samples to OEMs.

The Roadway Sensors segment net sales grew a little bit more than 2% year-over-year. Despite increased pricing pressure in recent quarters, we were able to retain and in some cases improve our margins as a result of product mix, and reduction in cost of goods.

To reaffirm from past calls, cost of goods reduction is an important initiative, and we look at a variety of variables, including our approach to product development, architecture and design, and our material costs and contract manufacturing. We have experienced a positive impact from our efforts on all of our product costs, yet retain and improve the quality of our products.

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 a video detection system designed to respond to the standards and functional requirements of the international market.

VersiCam Wireless combines maximum detection flexibility with the freedom of wireless sensitivity, and helps agencies looking for efficient and alternative communication, which in some cases applies to temporary detection areas such as construction zones. Abacus helps both domestic and international agencies leverage their current surveillance camera systems, and turn them into detection and incident management systems.

As evidenced by several recent orders, Abacus has been well received in the market, and agencies realize its cost effectiveness, and the ability to leverage their existing infrastructure for more functions. For the international markets, we are in partnership discussions with several system integrators, and distribution channels, which we believe will allow us to better access the market.

Two key drivers for this revenue stream in the upcoming quarters are expected to be increasing traction in domestic markets as we expand our core and addressable market through the depth and breadth of our product portfolio. We have three new major products to introduce in the upcoming quarters that address the market demand, but for competitive reasons I cannot elaborate at this time.

Traction primarily through innovative product offerings tailored to the international market and forging partnerships to expand the distribution channels internationally. In summary, first, we are pleased with achieving revenue growth in our product segment. We believe our commitment to R&D and innovation, operational excellence, and expected demand for our expertise and technology should help us grow and position us better competitively going forward.

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. In the coming years, we anticipate that the level of funding will significantly expand. We expect to take advantage of the highway bill, dedicated transportation funds through various bonds, dedicated sales tax, and gas tax in the coming quarters.

We're executing on our strategic plan, and continue to review possible acquisitions for key IP and companies we believe can help us accelerate our growth. I'm optimistic about the traffic management market, and Iteris position in the upcoming quarters, and believe our investments in sales and marketing and R&D, as well as continued execution of various initiatives and strategic plans should help us sustainably grow both top and bottom lines domestically and internationally. We expect year-over-year revenue growth for the next quarter.

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

Thank you, sir.

(Operator Instructions)

Our first question comes from the line of Jeff Van Sinderen with B. Riley. Go ahead.

Good afternoon. I wonder if you can just give us the latest thoughts on the Systems business, as it relates to budgetary constraints springing up. I know you mentioned that you think that business will begin to improve. And then, also maybe you can give us any new developments that you are hearing about in terms of the federal highway bill?

Yes. Thank you, Jeff Van Sinderen. Why don't I tackle the last part of your question first? With regards to the federal highway bill, as you know, we envision the total to be about $500 billion, which is twice as much as what the current bill is. it has been delayed a few times, but the federal government is extending it to the current expenditure level.

We have not seen any additional discussion as to when specifically this may pass. We realize that there are several important bills at the Congress, and with the political situation that we are in, we are hoping that over the next six months to a year that there will be some resolution on this bill.

Despite that there has been a variety of other funding sources coming to our market and Iteris has been benefiting from that. In particular, in the recent months, we saw the President a few weeks ago announcing additional $50 billion coming to infrastructure, which we expect making its way for Iteris into request for proposals in the upcoming weeks. We also have seen variety of local municipalities tailor funds for transportation helping us.

Case in point, just a couple of months ago, we saw the first large contract coming out of Council of Governments here in Southern California. We were awarded about a couple of million dollars worth of the program management to oversee the South Bay area of Los Angeles, which includes about 2 million to 2.5 million population. And the plan is to spend about $900 million worth of infrastructure funds for that area in the upcoming years as part of this program.

There are other federal programs we have seen in other states, some states funded programs, design build projects, we have seen some transit activities. I just presented to our board meeting last night, as a matter of fact four pages of list of variety of projects that we are proposing either actively, or looking and monitoring for them to come up.

So in summary, Jeff, we have seen expand at request for RFPs just in recent couple of months or so. So, I feel optimistic about the stabilization or, if you will, expansion of the market going forward.

Okay. I know you said you expect revenues to grow year-over-year for Q3, or at least I think that is what you said. Would you expect the Systems business to begin growing year-over-year for Q3, or do you think it is largely going to be driven by the Sensors business?

That statement was correct. I did say that I expect year-over-year our revenues to be higher for Q3. I also expect improvement for the systems revenue as well. Keep in mind, however, that the third quarter typically there are six, seven less number of days, so apples-to-apples I certainly expect improvement for systems. We already see some major projects are kicking off. We have had some delays, several projects saw delays that we actually have been awarded, the projects didn't go away. They just moved to the right a little bit. I'm optimistic about the Q3 for the systems revenue.

Okay. Got it. And then maybe you can just review for us, since the truck market is such a major market for you, where you stand in winning OEMs for the European truck mandate, how you will be positioned there and what portion of that business you think you can get.

Sure. You know, we really like our position in that market. We are the market leader and his last nine months, we have actually signed three major contracts that we have announced. First it was with Scania, I believe, we announced during the third quarter of last fiscal year. Then we announced MAN, another three-year contract, and then earlier this quarter we announced a five-year extension with DAF.

These OEMs, plus others, we're in touch providing them with solutions and technologies, and anticipate there are RFPs coming up so that we could propose, and perhaps leverage our strong offerings today to be able to get the extension of those in preparation of the mandate for 2013 and 2015.

We're also talking to potential partners. This would be a significant increase in production for us, and trying to seek help and see how we could leverage our technology with perhaps much larger entities that could penetrate into that market from a sales and marketing standpoint. I should also mention that just from the overall growth of the market, we have seen a couple of our OEMs in the recent months to put additional orders. So that looks pretty good, and again, I would anticipate year-over-year growth -- continued growth, for our vehicle sensors revenue stream.

Okay, good. And then, I know you are excited about the Safety Direct Meritor partnership, and maybe you can just mention how Qualcomm fits into that alliance and maybe any thoughts on how you might be able to improve margins based on that type of product.

Absolutely. We are very excited about the Safety Direct. we launched, as I indicated in my remarks, at the National ATA Convention in Phoenix earlier this week, and it was very well received. We are very pleased with that. The way Qualcomm is to play is that they basically are a conduit to be able to bring the communication, the data that we are collecting, communicating it from the trucks via GPS to centers that would be analyzing this.

We are working with Qualcomm, with PeopleNet, and others that are providing this conduit and enabling arrangement. We have done quite a bit of tests that we completed in the last two, three months on the Safety Direct with various fleets and couldn't be more pleased with the results, and really expect pent-up demand on this.

Okay. But this is a product that carries a high margin for you, if I recall, so this is something that as it grows it could actually start to impact your overall gross margin in the segment. Is that correct?

We belief so, Jeff. This would have a higher margin than our product lines. I would not comment on the specifics at the moment, but your statement is correct.

Okay, good. And then finally, just wanted to ask you your thoughts on share repurchase given that you are starting to build cash now. I know you mentioned also potentially acquisitions, but it seems like maybe this is a time with your stock being fairly low, where it might be advantageous to start repurchasing some stock.

You know, we in the recent quarters bring this up to the board, and discuss it. And in fact, we have just discussed it at our very last board. We have not received a specific direction as to when to trigger something like that. We understand the sensitivity of the pros and cons of this issue. We believe we should realize that our overarching approach really is that we are a technology company. We want to try to use our funds to invest it properly, whether it is in R&D, in sales and marketing, or acquisition.

Having said that, I at the risk of repeating, would submit to you that we are sensitive and understand the importance of that strategy when appropriate, and our board is very much in tune again with the pros and cons of that. And I would envision that if appropriate and when appropriate, we would be exercising that.

Okay. Very good. Thanks very much, and good luck for the rest of the quarter.

Thank you, sir. I appreciate all your wonderful questions.

Our next question comes from the line of Nick Heymann with Sidoti & Company. Go ahead.

How are you doing, guys?

Good afternoon, Mr. Heymann. Thank you for calling.

No problem at all. Basically, you guys have talked about a few sources of funds that you plan on supporting contract revenue growth prior to the federal highway bill being passed, and my question is basically are these sources basically just helping you guys keep your head above water in that segment? Or, is there anything within these sources that you really think can significantly contribute to revenue growth going forward?

The latter. Because some of these revenue sources are focused in important areas that are core markets, we believe that the opportunity is there for us to really take advantage of the market, perhaps trap some market share and the kinds of initiatives that we have are focused in response to the type of demand that these types of funds are really directed to.

I should also point out that again at the risk of repeating, although federal highway bill is delayed, we're still enjoying the current level of expenditure. Some of the issues that we are experiencing nationwide is just the budgetary issues with the local state and municipalities. And as some of these funds gradually come through, they are loosening and they are spending, and we're seeing sort of green shoots already in some specific areas.

Okay, great. And also, can you give us a little bit of an update on the work you guys have been doing in Dubai, and Abu Dhabi and things like that? And, has there any traction been made in terms of looking elsewhere and expanding globally?

Yes. The United Arab Emirates and Middle East are key geographic areas for us to expand. We are expanding our presence. We are hiring the staff, we are proposing on major projects. We are receiving contracts, and we would be announcing certain awards when appropriate, but yes, that is a key area for us.

We have been quite fortunate with some projects that we have already received awards and successfully completed, and we are leveraging and building upon that. we see that as a good market for us. We have enjoyed that in our product side of the house, and now in the traffic management consulting, and we plan on leveraging those two together to further expand it.

Okay. Thanks, guys.

Thank you.

(Operator Instructions)

Our next question comes from the line of William Meyers with Miller Asset Management. Go ahead.

Yes. Can you give us a break down of revenue by segment? Do you do that?

Thank you, Mr. Meyers. I will let Jim Miele our CFO address that.

We don't normally do that, but clearly from the press release the consulting contract revenues were $5.2 million. The product net sales were $8.9 million. That was comprised of approximately $1.6 million from vehicle sensors, and the remainder about $7.2 million, $7.3 million from the Roadway Sensor segment.

Okay, great. That is all I need today. Thank you.

Thank you, sir.

(Operator Instructions)

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Mohaddes for his closing remarks.

Ladies and gentlemen, again we appreciate everyone's support and thoughtful questions, and look forward to updating you on our continued progress. Back to you Melanie.

Thank you, sir. Before we conclude today's call, we would like to remind all participants that during the course of this call, Iteris made forward-looking statements regarding future events, or the future performance of the Company. The forward-looking statements discussed during the call are based upon information currently available.

This information will likely change over time. By discussing the Company's current perceptions of the market, and the future performance of the Company and its products, Iteris it not undertaking an obligation to provide updates in the future.

Actual results may differ substantially from what is discussed today, and no one should assume that at a later date the company's comments from today will still be valid. Iteris refers 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.

Thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.