Iteris Inc (ITI) 2011 Q3 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris financial results for its third fiscal quarter ended December 31, 2010. Joining us today are Iteris President and CEO, Mr. Abbas Mohaddes, and the Company's CFO, Mr. Jim Miele. Following their remarks, we'll open the call for any questions.

(Operator Instructions)

I would also like to remind everyone that a webcast replay of today's call will be available via the investor section of the Company's website at www.iteris.com until February 24, 2011.

Now, I would like to turn the call over to Mr. Mohaddes. Please, proceed.

Thank you, Jennifer, and good afternoon, everyone. Thank you for joining us today to discuss our recent results. As you saw at the end of -- close of the market today, we issued a press release announcing our financial results for the third fiscal quarter of 2011.

Our sensor segments continue to drive growth in revenues, while we generated another quarter of positive free cash flow and maintained a strong balance sheet. We plan to utilize our strong financial position to build on our successes and make focused investments in R&D and sales and marketing to keep our technologies at the forefront of the intelligent transportation systems market.

This strength is evidenced by our fourth consecutive quarter of year-over-year revenue growth in the product side of our business. We believe we are expanding our market share as a result of our R&D initiatives, and expect the uptake in demand for our offerings to continue.

Although the transportation systems segment revenues were down for the quarter, due to the ongoing weakness of the market and lengthening of the overall sales cycle, as well as the delay of certain contracts, we remain optimistic on the growth prospects for this business segment.

In fact, during the quarter, we grew our systems backlog by $1.6 million to $27.9 million, and we have already seen an increase in requests for proposal in key markets. Further, we continue to believe funding for transportation systems services will increase through newly allocated funds and the priority of infrastructure spending by the current federal administration.

Now, before I comment further, I would like 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'll return to discuss some more of the highlights for the quarter and how we plan to continue to build shareholder value in 2011. Finally, we will open the call for your questions.

Jim?

Thanks, Abbas. Good afternoon, everyone, and thank you again for joining us today. For the third quarter ended December 31, 2010, our net sales and contract revenues increased 3.4%, compared to the same year ago quarter, to $14 million. The overall increase was mainly as a result of a 13.9% and a 24.8% increase in net sales of our roadway and vehicle sensors products, respectively. These increases were partially offset by a 12.2% decline in transportation systems contract revenues.

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.

Our gross margins for the quarter were 41% and were consistent with margins reported in the prior year quarter. Operating expenses were $13.5 million for the third quarter, including a non-cash goodwill impairment charge of $8 million.

In accordance with interim period requirements of the statement of financial accounting standards, ASC 350, goodwill and other intangible assets, we reassessed the carrying value of our goodwill as of December 31 and concluded goodwill related to the transportation systems segment was impaired.

The impairment charge was mainly as a result of lower than estimated and expected operating results generated by the transportation systems segment and the ongoing weakness in the system's markets. The goodwill impairment charge is a non-cash adjustment, which has no affect on our cash flows or liquidity.

With this impairment charge, our net loss totaled $7 million, or $0.20 per share, for the quarter, compared to net income of $709,000, or $0.02 per fully diluted share in the same year ago quarter.

However, excluding non-cash charges for goodwill impairment, amortization of intangible assets, and the stock based compensation, net income in the third quarter totaled $403,000, or $0.01 per fully diluted share, as compared to $840,000, or $0.02 per fully diluted share in the same year ago quarter.

For a reconciliation of net income [and] loss, as calculated and presented in accordance with the US GAAP, the non-GAAP income and earnings per share for all periods presented, please refer to the table attached to the Q3 earnings release.

We ended the quarter with $12.5 million in cash, up from $10.4 million at the end of fiscal 2010 and up from $12.3 million reported at the end of fiscal Q2. Additionally, we generated another quarter of positive free cash flow and approximately $4.3 million in positive cash from operations for the nine month ended December 31, 2010.

At the end of the third quarter, we maintained roughly $14.6 million in deferred tax assets, which can be used to offset future taxes payable, and we've not yet drawn on our $12 million line of credit with our senior letter and continue to reduce our long-term debt, which now stands at $3.4 million. This concludes my comments on the financials.

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

Thanks, Jim. We are tenaciously executing several initiatives, including strategic marketing agreements, key product developments, and further market penetration in specific areas. In addition, we continue to review possible acquisitions for key IP and companies we believe can help us accelerate our growth. In fact, commencing the key elements of our accelerated growth is strategy of targeting synergistic companies that enhance our IP.

During the quarter, we acquired privately held Meridian Environmental Technology. We acquired Meridian for approximately $4 million in cash, plus a $2 million earn-out and expect the acquisition to be immediately accretive to earnings.

Meridian is a leader in 511 advanced traveler information systems, as well as maintenance decision support system management tools that allow users to create solutions to meet roadway maintenance decision needs. With Meridian, we believe Iteris is better equipped to empower travelers and traffic management authorities with more accurate and real-time information and network performance management.

Meridian already works with several states relative to 511 travel information systems. And together, I feel we are better positioned to capture a much larger market share, while jointly developing and enhancing related software for the industry.

Now, I would like 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 12%, year-over-year, which, as I mentioned, was largely due to ongoing weakness in the market and a lengthening of the overall sales cycle, as well as the delay of certain contracts. In addition, from a seasonality perspective, the third quarter is generally our lightest revenue quarter across all business segments.

However, as I indicated earlier, we added $1.6 million to our systems backlog with some significant wins. For example, we were selected by the Orange County Transportation Authority to complete the design, implementation, and support services for traffic signal synchronization on three corridors within Orange County. We have already begun work on this project, which we anticipate will generate approximately $1.7 million in revenues.

We also were awarded a $750,000 contract to design the upgrade and expansion of Oxnard's traffic control system and look to complete this project within six months.

And earlier in the third quarter, we were selected by the State of Utah to provide software support services for our CVIEW-Plus system and commercial vehicle information systems and networks, currently operated by the Utah Department of Transportation's Motor Carrier Division. We began this work in the third quarter, and the contract has a potential value of $700,000 over the next two years.

We have also continued our expansion of leadership positions and product and services development in this market. As the overall transportation funding begins to increase, as I believe it will, Iteris will be strategically positioned with best-in-class technologies and talents to benefit from this.

At the end of quarter, we had $27.9 million in total backlog, including $7.1 million of new signed contracts during the quarter. This compares to $5.2 million of new signed contracts in the previous quarter.

Key drivers in this revenue stream are expected to include, a, our focus on large opportunities, including design-build contracts, which are typically several million dollars. We are tracking several such projects that we anticipate will grow revenues in this area. For example, we have recently submitted a proposal to a state agency for a design-build project valued over $10 million.

B, 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 anticipate 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 plan to develop additional demonstration sites.

C, we plan to make additional investments in sales and marketing domestically and internationally. These investments should help us grow our offerings going forward. For example, during Q3, we established an Iteris office in Abu Dhabi.

As I have indicated in the past, a significant component of future federal funding will be the federal highway bill, which is up for renewal, and we expect it to be introduced in Congress this year.

While the magnitude of the bill remains difficult to estimate, in light of the current budget challenges, we anticipate the funds dedicated to the application of technologies in transportation to be significantly higher than the current bill. We are watching it closely, as it goes through Congress, and we believe a bill will pass, which should ultimately benefit Iteris by funding incremental growth.

Also, there are variety of other transportation related funds flowing into our markets, including various stimulus funds, infrastructure funds, high-speed rail transit funds, such as those articulated by the Vice President on Tuesday in Philadelphia, a state and local agency bond, tax hikes, focus on transit, and transportation infrastructure improvements.

We are monitoring this progress and working closely with many of the agencies, who benefit from these funds, through the request for proposal process.

Finally, as Jim mentioned, we took an $8 million goodwill impairment charge, due to lower than estimated cash flows provided by the transportation systems segment. This accounting treatment in no way impacts our bullish, long-term view of this business segment, and we are very much looking forward to building of the additional $1.6 million backlog achieved in this segment during the quarter.

The vehicle sensors business segment continued to grow, increasing 24.8%, year-over-year. This revenue stream has seen a stabilizing production rate and a gradual increase in orders, particularly with our OEM customers.

We launched our SafetyDirect software during the quarter with our partner, Meritor WABCO. We believe this partnership will increase penetration into a large number of fleets interested in SafetyDirect. For example, through our partnership, we announced the collaboration with Qualcomm to provide data to fleets, using their Mobile Computing Platform Series.

We are making good progress in the development of our Forward Collision Warning system and finalizing demonstrations, files, and testing. We are very pleased with the LOI we have signed with Audiovox to provide active safety products to markets assisting distracted drivers. We are finalizing our definitive agreements, and expect to have our first product introduction this fall.

There are four key drivers we believe will help grow this revenue stream. Number one, the European Union mandate of key active safety features, which we believe will include a 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 the response -- we are preparing to respond to this anticipated demand and seeking partnerships to help us take advantage of this potentially significant expanded market.

Number two, market penetration of our SafetyDirect software. We are enthused by the market's reaction to this revolutionary software and have already seen its contribution to third quarter's revenues. Together, with our partner, Meritor WABCO, we will be reaching out to major fleets as part of our marketing campaign.

Number three, 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.

And number four, penetration into consumer aftermarkets. The distracted driver accidents are finally getting national attention, both from the media and the government, and we believe active safety technologies, including Lane Departure Warning and Forward Collision Warning, are excellent solutions. We are excited about our partnership with Audiovox and optimistic about the prospect of positive market reaction.

The roadway sensors business segment's net sales grew 14%, year-over-year. And 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 one of our key initiatives, and we look at variety of variables, including our approach to product development, architecture and design, and our materials cost, 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 products offerings have been well received by the market, specifically, Pico, Wide Dynamic Range, or WDR cameras, and Abacus.

If you recall, Pico is a video detection system designed to respond to the standards and functional requirements of the international markets. During Q3, we sold about 500K, just in the international market, and anticipate the demand for this product will continue to grow.

Wide Dynamic Range cameras are helping in better visibility during adverse conditions. 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, as agencies realize its cost effectiveness and the ability to leverage their existing infrastructure for more functions.

For the international markets, we recently grew our sales and marketing channels, adding a VP of Business Development and are in partnership discussions with key system integrators and distribution channels, which we believe will allow us to better access the markets. I am pleased to say that 25% of our roadway sensor product sales they're derived from products we have developed over the last two years.

Two key drivers for this revenue stream in the upcoming quarters are expected to be, one, increasing traction in domestic markets, as we grow our core and addressable market through the depth and breadth of our product portfolio.

We plan to introduce new measure products in the upcoming quarters that address this demand, as well as a new generation of key products, but, for competitive reasons, I cannot elaborate at this time. And, two, [proaction] primarily through innovative product offerings tailored to the international markets and forging partnerships to grow this channel.

In summary, we achieved our fourth consecutive quarter of year-over-year revenue growth in our sensors business, and we believe our commitment to R&D and innovation, operational excellence, and expected demand for our expertise and technology has helped produce these results and will continue to push us competitively going forward.

Our balance sheet remains strong, and coupled with significant cash flow, we have the stability needed to execute on our broader strategic initiatives. I am pleased we were able to complete the acquisition of Meridian, and believe we will be benefiting from the synergies it is generating with Iteris going forward. We continue to review additional possible acquisitions for key IP and companies we believe can help us accelerate our growth.

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

Finally, I remain optimistic about the traffic management market and Iteris' position in the upcoming quarters. I believe our investments in sales and marketing and R&D, as well as our continued execution of various initiatives and our strategic plans, should help us grow, both domestically and internationally. We have already begun to realize synergies from the Meridian acquisition, and expect sequential growth on both the top and bottom lines for the next quarter.

Now, with that, we will be delighted to respond to your questions and comments. Jennifer?

Thank you, sir.

(Operator Instructions)

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

Good afternoon. I wonder if you can talk a little bit more about the federal highway bill, because it sounds like you are a little bit more confident about how that's progressing. Maybe you can just give some thoughts there and how you see that playing out.

Yes, thanks, Mr. Van Sinderen. The highway bill was expired about a year and a half ago, and traditionally, what the feds have done was to keep extending it. And they have done it the same way several times now, for a month extension, couple of months' extension, and, in one case, six months' extension.

And what happens is that they continue providing funds at the same level as they have in the current bill. Now, what we believe -- this is just discussion with various individuals on the hill that are putting together the bill -- is that this year, they would be going back -- we are not quite sure whether they go for six or possibly three years.

We are not sure as to the magnitude of the bill, whether it would be at the same amount or possibly more. What we truly believe is that the magnitude that will be in the new bill, as it relates to our business, application of technologies in transportation, should significantly increase.

There are a variety of reasons for that; various trials, demonstration projects in all aspects of traffic management have been on the table in the recent years, and we have reasons to believe that that magnitude of funds, over the last bill, would increase.

Okay. Do you have a sense of timing of when you think this bill would be passed?

Well, the current extension expires in July, so our feeling is that by then, we should see a bill introduced to Congress.

Got it.

That is our best estimate and anticipation. Again, discussing with various people, various organizations, and as you know, we are well connected with many of these organizations, and talk to various Congress aides and so on. That's kind of what we hear at the moment.

Okay, good. That's helpful. And then, maybe you can go into a little more detail on how the Meridian acquisition fits into your strategy and how you plan to grow that business and leverage it.

Yes. Meridian -- we have been working with them for a few years, and we are quite excited about the culture fit and how well our staffs have worked together. What we have done in the past is joining forces for 511 type of projects.

Now, Meridian already has eight states that they serve with their 511, some of which we are working together, such as the state of Georgia, and we are working with some as well. So, when we put our forces together, now we are one of the top two or three providers of travel information system 511, nationwide. And that synergy really helps us to take more advantage of the market share going forward.

Another major offering that Meridian affords us is the software tools that they have developed, relevant to decision making process. I'll just give you an example.

For several states, when the weather gets tough, and let's say a section of the roadway is about to ice, let's say at noon, Meridian, because of a couple of dozen weather forecasters that they have on board, they tailor that to a specific roadway segment, in such a way that they could advise a highway department, if icing is at noon, why don't you go and dump two trucks of salt at 10 a.m., as an example.

That precision of decision support system is really saving tens of thousands of dollars for many of these agencies. And that decision support system's tools and capabilities, we believe, have direct relevance and application to some of the traffic management center and performance measurement activities and developments that we are doing.

So, going forward, I really see the synergies at two, possibly three, various technical levels. And, of course, doing marketing that we would be doing and have been doing would help us quite a bit as well. So, I'm really happy with that acquisition -- immediate accretive. And I believe that they helped us, both on top and bottom lines in this quarter that we are in right now.

Okay. So they should actually be able to help you build out some of your new products by utilizing their technology.

Absolutely.

Okay, good. And then, maybe you can just touch on the Qualcomm partnership and the significance of that.

Sure. So, the SafetyDirect that we have partnered with Meritor WABCO is really helpful for us to penetrate into many of the large fleets that would love to empower their drivers, their fleet managers, giving them real-time data in performance of the driver and the vehicle.

So, if you're on a ramp, as an example, you could send information that how that vehicle performed, or during a certain time, how many times a driver passed a lane or switched a lane unintentionally and so forth. Now, this information, in order to make it real-time and getting it back to many of these fleet managers, would require over the air satellites or various communication means to get that back.

Now, Qualcomm is the nationwide leader in providing that kind of a communication, so that relationship has been a key for us to be able to provide that kind of information to our customers. So, the Qualcomm relationship is really an added value for us to be able to easily and readily provide that information to the end users.

Okay. Is there anything else you can tell us about the Audiovox product introduction and how that business model will work when the product is being introduced -- that sort of thing?

I could elaborate on it a little bit, although I'm somewhat hesitant, because we are finalizing the definitive agreement, and until that agreement is signed, probably not a whole much to elaborate.

But what is very exciting about it -- I could tell you this. We were at the press conference at the show -- consumer electronic show back in January. Over 200 people from media were present when Audiovox announced their partnership with Iteris and their plan to introduce our product to market, responding to the distracted drivers.

We put out a joint release, and I could highlight some of the things that we said in that release. First of all, the product would be developed by us, 100%, and then, we would pass it on to Audiovox, and the idea is that they would totally manufacture, market, and sell it through a variety of channels that they have.

And that -- the initial price is envisioned to be $599. And we have a royalty model that we are executing with them that would help us bring in rather high margin revenues to our organization. That's probably the extent of what I could elaborate at the moment, Jeff.

No, that's helpful.

Yes, we are quite enthused about it, to be able to really identify a whole new channel really helping the travelers with such a wonderful solution. We hear from people -- from focus groups that we have done, young drivers would love to buy it for the parents, and parents would love to buy it for their young children.

And it is just such a refreshing solution that could really help reduce so many accidents that unfortunately take place on our roadways and freeways regarding distracted drivers.

Absolutely. My last question is really pertaining to international, and just wondering if you can give us any color on how the Abu Dhabi office opening has gone -- how things are progressing there?

Yes. We announced probably about a year ago that we were awarded a major project. Subsequent to that, there has been some new developments that, at the moment, I cannot elaborate, but we are working with the government over there and namely, the Abu Dhabi DOT.

And we feel that the prospect of the market there is quite significant for us, and we are really investing in sales and marketing. We actually established an office earlier last month, and we anticipate that market to grow for us.

That's great to hear. Thanks very much, and good luck for the rest of the quarter.

Thank you, sir. I appreciate the questions.

(Operator Instructions)

Our next question comes from the line of Nick Halen from Sidoti & Company. Please, proceed.

Hey, guys. I was wondering if maybe you can give us a little more clarity and a little bit of an update on the trend in what you guys are seeing in alternative sources of funds. I guess, basically what I'm asking is what does the spending look like now as opposed to, say, I don't know, maybe six months to a year ago?

Are you seeing more money flowing through the system? And, I guess, in addition to that, I guess, what does your market share look like, in terms of that, going forward?

Yes. Thank you for the question, Mr. Halen. Yes, the funding, we feel, in many markets, is stabilizing from a federal fund standpoint. The stimulus funds, by the way -- year-to-date, we have had about 10% of our revenue in roadway sensors from the stimulus, and we believe that that is going to continue via several construction projects that we hear in various parts of the market.

In some specific market areas, and I'll just give you Los Angeles, as an example. A year ago, they passed a tax hike, $0.005, that is going to add billions of dollars over the next 30 years, dedicated for infrastructure improvements, application of technologies in transportation, that we are benefiting from.

In fact, we received an award couple of quarters ago. This particular measure was called Measure R. And we were selected for a couple of million dollars to provide some assistance to South Bay area of the county. And there are other areas in the East, even Midwest, up and down the west, that have had some pockets of success with these measures.

So, in summary, what I could tell you is that, over all, the funding is not significant than more than what it was six months ago or a year ago, but we have seen a stability, and we have seen some pockets that would be using more funds.

And of course, I remain quite optimistic and, in fact, bullish about upcoming quarters with various funds loosening up, whether it is bonds or measures, in different parts of the country. Now, I say all of that in a backdrop of many of the state and some local agencies really struggling with their overall funds.

In transportation industry, we are somewhat fortunate that it is one of the areas that it doesn't typically get an immediate impact. The erosion is not similar to some of the other programs, if you will, and so, that's sort of where my optimism stems from.

Okay. That was very helpful. Thank you. Also, just one more question I had, in terms of the Meridian. I was wondering if you guys have at all, in the past, or, if you can, maybe give us a little insight into how you guys are monetizing Meridian? And, I guess, when do you guys expect to begin seeing revenues, or are you seeing revenues already from that?

Yes, Mr. Halen, we are seeing the revenues immediately. Meridian has been in business for some -- I want to say 17 years or so. It's a growing business. They are penetrating into some exciting niche markets, and this quarter that we are in right now -- by the end of the quarter, not only that we would see some revenues from them. I would anticipate in excess of $1 million worth of revenue and some operating income as well, and I'm pretty confident about that.

Okay. All right. That's very helpful. Thank you, guys.

Sure. Sure. No, that Meridian acquisition has been an excellent acquisition for us, from various angles that you look at. We were quite sensitive about accretiveness of them from the operating income and revenue and so on.

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. I look forward to updating you on our continued progress.

Before we conclude today's call, I would like to make a moment to read the Company's Safe Harbor statement. 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 is 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 SEC, specifically, the Company's most recent form10-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.

30 P.M. Eastern time today. Please follow the instructions in today's press release. An audio webcast of this call also will be available for reply via the investor relations section of the Company's website, www.iteris.com.

This concludes today's call. Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.