Iteris Inc (ITI) 2012 Q2 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 second fiscal quarter ended September 30, 2011. Joining us today are Iteris' President and CEO Mr. Abbas Mohaddes and the Company's CFO Mr. Jim Miele. Following their remarks we will open your call for your questions.

(Operator Instructions)

I would also like to remind everyone that a webcast of today's replay will be available via the investor section of the Company's website at www.iteris.com until November 10, 2011. Before we start today's call I would like to take 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 will make forward-looking statements regarding future events for the future performance of the Company.

The forward-looking statement discussed during the call are based up on information currently available. This information will likely change overtime by discussing the Company's current perceptions of the market and the future performance of the Company, its products and services. 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 comment will be 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.

Again I would like to remind everyone that this call will be available for replay via telephone through November 10, 2011 starting at approximately 7.30 PM eastern time today. Please follow the instructions in today's earnings release. An audio webcast of this conference will also be available for reply via investors section on the Company's website at www.iteris.com. Now I would like to turn the call over to Mr. Mohaddes. Sir, please proceed.

Well thank you, Craig, and good afternoon everyone. As you saw at the close of the market today we issued a press release announcing fiscal results for our second quarter of fiscal year 2012. Overall I'm pleased with our performance this quarter both strategically and operationally. Our very consensus divestiture was completed during this quarter allowing us to turn our focus on enhancing and broadening the technologies that address our core market of traffic management.

We achieved double digit sales growth for the quarter and are executing on our strategic plan of establishing Iteris as a pure play company in the growing market and to become the leader in providing information management solutions for intelligent traffic management market. But 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 quarter. Afterwards I will return to discuss some more of the highlights for the quarter and how we plan to build shareholder value in fiscal 2012. 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 second quarter ended September 30, 2011 our net sales and contract revenues increased 15% to $14.4 million over the same year ago period. The increase was primarily due to a 27% increase in transportation systems contact revenues and a 7% increase in net sales of Roadway Sensors products. The operating results for both periods do not include the operations of the divested vehicle center segment, which has been classified as a discontinued operation. The year ago quarter did not include revenue from Meridian Environmental Technology or MET our wholly owned subsidiary acquired in January 2011.

As there are different characteristics affecting each of our revenues streams and different attributes affecting our financial results Abbas will provide more detail regarding our net sales and contract revenues later in his comments.

Gross margin in the second quarter was 41.7% or $6 million compared to 45.5% or $5.7 million in the same year ago quarter. Gross margin in the second fiscal quarter of 2012 was impacted by normal seasonality associated with MET's weather forecasting services in summer months and to a lesser extent the system consulting contract. Roadway Sensor's gross margin was strong for the quarter at greater than 50%.

Operating expenses increased 10% to $5 million for the second quarter and were primarily related to additional Roadway Sensors sales and marketing expenses, the inclusion of Meridian's operating expenses, additional R&D costs related to new Roadway Sensors product development and development of our iPerform, Performance management software. We reported a $4.3 million gain on the sale of the vehicle sensors asset and a $3.2 million related federal and state income tax provision resulting in a net gain of $1.1 million, the effective tax rate applicable to the gain was impacted by goodwill of $4.7 million attributable to the vehicle sensor segment to which there is no corresponding tax base.

As a result the tax provision on the sale is disproportionate to the book gain. We expect to utilize federal net operating loss carry forwards to substantially offset taxes payable on the transaction. In addition as many of you know the State of California has currently suspended the use of net operating losses to offset taxable income.

Historically, the suspended NOL's could be carry forward and used to offset taxable income in future periods. Recent California legislation rules that if a company had NOLs that would have expired and otherwise not be used they cannot be carried forward. Due to this ruling we wrote off 484,000 of California NOLs in the current quarter and this is the reason for the quarter's disproportionate tax expense.

However, we saw other NOLs that are not expiring can be used in the future. As of September 30, 2011 Iteris currently had $28 million and $10 million in gross federal and California State NOLs respectively. GAAP net income was $1.3 million or $0.04 per diluted share in the second quarter of fiscal 2012 versus $500,000 or $0.02 per diluted share in the same year ago quarter.

We ended the quarter with $22.8 million in cash compared to $11.4 million at June 30, 2011 and initiated the stock buyback program during the quarter where we repurchased approximately 132,000 shares of common stock. Since the end of the quarter an additional 72,000 shares have been repurchased for a total of 204,000 shares. We've not yet drawn on our $12 million line of credit with our senior lender and reduced our long-term debt by another $500,000 to $2 million. This concludes my prepared comments on the financials now I would like to turn the call back over to Abbas who will discuss the quarter and our year as well as our strategy in greater detail. Abbas.

Jim, thank you very much. As I indicated at my opening remarks Iteris has certainly begun executing upon our strategic plan for growing this company as a pure play in traffic management market and to become the leader in providing information management solutions for intelligent traffic management market.

For the rest of my prepared remarks I would like to focus on the steps we have taken to get us here some additional detail underlying this quarter's results, new products we have unveiled and are outlook for the remainder of fiscal year 2012. So first I would like to talk about the closing of our Vehicle Sensors divestiture during the quarter.

The divestiture marks an important step you know overall strategy to transform Iteris into a pure play traffic management company. Beyond its fiscal benefits the divestiture allows management to focus it specifically on opportunities in traffic management information solutions. We plan to further enhance our intellectual property through opportunities much like our successful acquisition of MET and pursue additional synergistic acquisitions. We also intend to continue our investment in R&D and server marketing which we expect will help accelerate our organic growth.

We are approaching our one year anniversary of acquiring MET and we have been very pleased with both its successful integration into our operations and its financial performance. In addition, MET's technology was important to our $10 million Virginia Department of Transportation. Further this localized and customized weather forecasting is an important feet to overlay on Roadway network and predictive traffic pattern in our high perform software system.

I would now like to further elaborate on the second quarter's results address our confidence into overall traffic management market and provide an update on our growth initiatives. Roadway Sensors net sales increased 7% year-over-year primarily attributable to two significant shipments that were booked in the previous quarter but shipped in fiscal Q2. At $7.7 million Q2 bookings were one of the strongest in the last several quarters also similar to Q1 Roadway Sensors backlog was as strong at $2.8 million at the end of the quarter one of the highest ending backlog levels for this segment in the last couple of years.

The strength of our bookings this quarter the trend over the last few quarters and our expanding backlog reinforces my optimism about our prospects for future growth. The new product offerings in the segment have been very well received by the market and we expect for these products to serve us well as the market recovery gains momentum. During the quarter we partnered with Argentina based Sutec Holding LLC to become the company's designated supplier of non-invasive video detection technologies for its traffic signal control systems in Latin America. This provided partnership enables Iteris to build on our existing local relationship and it strengthens our presence in key Latin America markets.

Our hardware and software video detection solutions allowed Sutec to meet the expanding needs of the Latin America market. Through this partnership Sutec will offer Iteris' complete line of video detection hardware and software management solutions. This includes Iteris' Pico camera system that was designed with international market in mind for use in intersection detection and other special applications. Pico has already been successfully installed in the city of [Lima], Peru by Sutec for an adapted signal control application.

Subsequent to the end of the quarter we announced introduction of Vantage Vector which is the latest addition to our portfolio of Vantage Vehicle Detection Solutions. Vantage Vector enhances the proven benefits of a video detection with radar sensor technology that extends the range of richness and detection data. Shipments are expected to begin in the first quarter of calendar 2012. Vantage Vector demonstrates the ability of market research and engineering teams to develop new technologies that better serve our customers and sustain on market leadership. This premium product is based on sensor fusion by combining video and radar and was developed for agencies that require and have detection for a special applications.

We expect the use of sensor fusion technology to contribute to the broader and more rapid adoption of video detection. These development both strengthen and expand our market leading position with Roadway Sensor and we are planning for continued investment in R&D and (Inaudible) marketing in this area as we build upon our year-over-year growth. Key drivers for our Roadway Sensors revenue stream into upcoming quarters are expected to be increasing traction domestically as we grow our core and addressable market through increasing the debt and breadth of our product portfolio. We plan to introduce more new products in the upcoming quarters that address underserved and emerging market segments.

In addition, we expect to benefit from an overall rise in the video detection addressable market. As end users increasingly recognize the benefits of above ground detection in comparison to legacy impalement technologies partnerships tailored to the international markets such as our Sutec contract signed this quarter. With several of our new products such as Pico and Abacus being well suited for international markets we are actively engaged in discussions with numerous prospective channel partners in various parts of the world. This approach added value for us in our fiscal year 2011 when our international sales grew substantially over fiscal year 2010 and we expect to gain additional leverage by continuing to expand our channel relationships.

In transportation systems, sales increased 27% year-over-year, which in part was due to the inclusion of MET revenues sequential revenues in this segment had grown four straight quarters. We are encouraged by the sequential growth in this segment and are also seeing an expanded number of requests for proposals particularly with regional agencies in many of our markets we serve. Over the last few quarters we have also added several senior associates processing business development experience which we anticipate will result in more contract awards going forward.

Near the end of our second fiscal quarter we also announced that VDOT selected Iteris for a $10 million travel and information services contract. It will provide the core services of 511 interactive voice response aggregating transportation video and managing web based traveler information and other data. We will also be responsible for distributing related information to the VDOT and traveling public as well as the other VDOT public partners. The initial five year task order based contract has an estimated value of $10 million; the contract also includes the option for two year extensions. Subsequent to the end of the quarter we received a first task order to begin work on the project valued at just over $3 million to be completed within six months.

MET's technology played a key role in securing this contract. This important and prestigious award adds to our already extensive portfolio of nationwide 511 services. We are pleased to be able to continue executing our overall growth strategy as a market leader in traffic management and information systems. We are now providing travel information services to nine of state agencies as well as two regional metros. We are actively tracking and pursuing several other 511 contacts on the horizon.

We also launched our iPerform solutions for the measurements and management of intelligent transportation networks. This software is a state-of-the-art information management solution that utilizes all available data resources to provide effective performance analysis and prediction. iPerform can fuse information from a full spectrum of sources including Roadway Sensors as well as weather and other traffic related data. iPerform provides this valuable information for not only freeways but also for (Inaudible) and multi model forms of transportation as well. This powerful information engine combines sensitivity analysis and performance management capabilities thus continuously evaluate and quantify network performance.

We expect to have our iPerform software available for distribution during the first calendar quarter 2012. With the increased emphasis on accountability in fast partition infrastructure expenditures the US Department of Transportation as well as the State DOT's are expected to use performance measures as their funding gate for agencies. In light of the legislation mandating real time interstate traffic programs by 2013 and metro areas routes by 2016. We believe iPerform ourselves a powerful solution to improve an agencies oversight and transportation network capabilities. We remain optimistic for the federal highway bill to be passed over the upcoming months. The current expenditure level was extended until end of March 2012 and as a result we have seen regional agencies preparing more request for proposals.

We believe in multiyear highway bill has solid by part support on capital bill. We also believe liberation of congress will commence shortly in addition we expect the funding attributed to traffic management in the new bill to be significantly higher than previous bills.

And this would ultimately benefit our cash. Also with our variety of other transportation related funds flowing into our market including infrastructure funds, transit funds, estate and local agency bonds, tax hikes, focus on transit and transportation infrastructure improvements. As this funding increases we believe that proactive as steps we are taking today will strategically position us with best-in-class technologies for the future.

Key drivers in transportation system revenue is stream for the remainder of fiscal 2012 are expected to include our expanded contract pipeline including major regional transportation planning and engineering, transit contracts, significant traffic management systems planning, design and system integration. As well as travel information systems and 511 contract.

We plan to continue our investment in sales and marketing domestically and internationally. These investments should help us grow our offerings going forward for example over the last two quarters we have hired key senior associates in several underserved markets to help us develop new niche markets and expand our market share. I would like to focus on three areas of our business where I see Iteris accelerating our growth in the upcoming quarters.

First we expect to see further expansion opportunities through our existing video detection technology and beyond. We plan to grow our product portfolio both domestically and internationally through the introduction of innovative and superior products that should benefit from the overall rise in the above ground technologies we are expecting worldwide. A classic example of this strategy is our recent introduction of Vantage Vector. Second, we believe Iteris is better positioned to capture a larger market within traveler information systems because of our acquisition of MET as well as value related R&D investments.

As a unified force in the marketplace we are marketing several new projects and developing and enhancing software for the industry. We are also committed to growing the weather information and decision support system offerings of MET and expect continued demand in the integration of weather information, precision support and traffic management.

The VDOT win proves that we should be well positioned to capture market share and third growing the performance, measurements and management niche with the launch of iPerform we have created an excellent platform, which should take market share in this segment.

In summary, the divestiture of our Vehicle Sensor Segment has put Iteris in a better position to focus and capitalize on the growing intelligent traffic management market. Our recent product introductions and double digit sales growth validate our strategy.

With this strong balance sheet Iteris will not only grow organically but also plans to proactively seek additional synergistic companies which would make our intellectual properties best standard of the intelligent traffic management market. We expect not only to grow our top line to leverage our software based products and services in a common market to enjoy attractive margins and earnings. Now with that we will be delighted to respond to questions and comments. Craig?

Thank you very much.

(Operator Instructions)

Our first question does come from the line of Nick Halen with Sidoti & Company.

Good afternoon guys.

Good afternoon.

So the first question I had I mean is it safe to say that you guys have been and are willing to take on some maybe some lower margin projects than you guys have in the past just because you know the highway bill still hasn't been passed and funds seem to be so low paid I mean what are your thoughts on that. Are you guys still looking at some maybe lower margin projects?

Not necessarily sir, we believe that market is fertile to really for us as a well established and a leader in this market to focus on higher margin opportunities. In fact we are quite careful when to go after various types of projects. One of the things that we are quite proud of at Iteris is that over the last seven, eight years that we have been carefully tracking our statistics as far as project win ratio is that I'm happy to report that we have a better win ratio than the average in the market.

OK, and then here you mentioned in your remarks that you plan on spending some money to drive organic growth in the company. So I mean would you expect OpEx what we saw in this quarter to be somewhat of a floor going forward or is this somewhat sustainable.

What we did the last two quarters by design we added about half a dozen senior staff primarily focused themselves on marketing and some in R&D to really boost our investments in anticipation of growth. It varies from quarter-to-quarter and we fear what the market trend is. But I would envision because of anticipated growth we would continue investing both in R&D and marketing.

Okay, and then just one more for me. I know you mentioned the alternative sources of funding are still there. But I mean is there any way you can kind of give us some color on to what that the trend in that funding has been. I mean is that increasing, is that kind of just staying the same and do you expect that will still be there once the federal highway bill actually went it if it doesn't get passed.

If I understood your question properly what is happening to the funding right now as far as the federal bill. We were quite fortunate to get extension till the end of March, which is great we have had extensions that were 30 days and 60 days it really wasn't as helpful.

So this length of extension really helps a lot of agencies to prepare request for proposals to send it out and they know the money is there. So that trend has been helpful. We are also confident and believe that the multiyear federal bill will pass before expiration of this expansion that we are in.

The other good news is that many of the local and regional agencies have been pursuing transportation related funds via various measures, bonds, tax hikes and so we benefit from a lot of that money and I feel pretty confident and optimistic about the revenue sources to be stable.

Of course we have get couple of years ago quite significant debt and we have since recovered. We have a lot more visibility really as I said in year-to-date than let's say a year ago, we feel pretty good about the trends of the funding sources at the moment. I hope that helps.

That definitely answers it. Thank you. That's all I have.

Thank you very much, sir.

And our next question does come from the line of Jeff Van Sinderen with B. Riley & Company.

Hello this is [Chris Erisman] calling in on Jeff's line. The partnership with Sutec in Argentina is intriguing. Can you elaborate a little bit more on this relationship and I know you said that there was -- they had installed some systems in Peru. So do you expect the partnership to extend throughout Latin America?

Yes and thank you for the question. So we have been doing some business in Latin America already, but this is target expansion market for us and we have looked at about a dozen different partners that we have in different countries in Latin America. Sutec stood up taller than many others. They are the large distributors with representation in several different countries and in fact just as last few weeks they have ordered a 4D Pico cameras from us.

So we expect Sutec to really help us penetrate further in Latin America. We have been working with them for a while. We established an excellent relationship. I've met the CEO, they have visited our offices in here. We have been at many of their locations and presence.

We feel very good about this partnership and they are also doing quite a bit in Brazil, Ecuador, Argentina of course that they are based in Peru and many other countries. So we are quite happy that we were able to forge that partnership with Sutec.

Have you guys provided any breakout of division revenues by geography?

I'm sorry could you repeat that question one more time please?

Have you provided any divisional breakout of revenues by geography?

Yes historically we have not, it hasn't been a significant component of our revenues in terms of geography at least for these two operating segments. Going forward, we may do that but it is on sort of SEC guidelines.

So, yes if it is helpful, I could tell you that the international expansion is one of our major initiatives. And currently our overall revenue from international market is, say about 10% or so. And we are expecting to double that up over the next couple of years by promoting our services and products in various areas around the world. At the moment, our focal point is Latin America and the Middle East, for products and for services in Middle East and we are doing reconnaissance in other parts of the world.

Right. I just have one more.

Please.

In regard to potential acquisitions, last quarter you mentioned that there was maybe a dozen organizations you might have potential synergistic opportunities for you. Have your overtures been well received and maybe could you give us a sense of how you feel about the opportunities in terms of availability and maybe in terms of the prices that might be being asked to you?

Yes excellent question. So, we have been working with various organizations. Some we have actually NDA quite a bit of them actually some, letter of intents. So we have handful on the fund burner as far as acquisition. We are quite careful. I should admit that over the last couple of years, let's say over 30 organizations that we have looked at, so far we have executed one. And we intend to execute more. But it is very important for us that we follow our criteria, some of which include very importantly culture set, of course synergy.

We are quite sensitive about that and, so yes we are pursuing others that anything will be perfect fit for our initiatives regarding traveler information at 511 and we are looking at that partnership in our other initiatives as well, specifically, international the partnership or possibly acquisition and also our iPerform to the extent that they could complement that to organic and acquisition that would be really opportunistic and synergistic for us.

As far as pricing, we love to see them accretive. We love to pay a reasonable appropriate price for them. But what is very important for us is the synergy. That is very important and then of course the price is typically what it is. We have guidelines and valuations by our financial advisors and so on. Appreciate the question.

And our next question does come from the line of Brett Reiss with Janney Montgomery Scott.

Afternoon gentlemen.

Good afternoon Mr. Reiss.

Did you give us a figure of what the average price per share you paid on the share buybacks in the quarter and year-to-date?

Yes, this is Jim Mr. Reiss. The average has been around $1.15.

Okay. And how much authorization remains?

Well, at this point we are authorized up to $3 million over a 12 month period and so we've roughly purchased currently about 200,000 shares at a $1.15. So, in the neighborhood of [$2.75 million] to $8 million left, to repurchase.

Okay.

That's probably the pricing to, I might add Mr. Reiss that from time-to-time we would be going to the Board of Directors and getting authorization for purchasing at the proper price.

Right. Right. For a company your size you have now quite a bit of cash. If juicy accretive acquisitions do not come along in the next couple of quarters, your thoughts on future allocation of capital would you be more aggressive on share buybacks if this fact is down here, or would you even entertain a dividend?

At the moment, it's an excellent question, at the moment, we are really focused on our strategic plan which is focusing our assets and expenditure in acquisition and organic growth, in terms of marketing, R&D, now this is fairly all in those orders. But, I should indicate though, when I look at various opportunities in the marketplace as far as target for acquisition, I feel a lot better now than I did about a year ago. It seems to me that a lot of the homework that we have done and our bankers have done, is really paying off to focus, laser focus if you will on synergistic and opportunities.

So I feel optimistic about our ability to be able to execute some of these acquisitions. At the same time, we have our quarterly Board meetings, we discuss our strategies and discuss a variety of opportunities regarding how to spend our capital and we get an excellent direction from the board at every quarter, one of which meetings is coming in fact in couple of weeks.

OK. Very good.

And thank you very much sir.

And our next question does come from the line of William Myers with Miller Asset Management.

Yes. I'd like to focus in a little bit more on the operating expense, in particular the research and development. Would the quarter's rate could we consider that a new run rate? Or as a percentage of revenue a new run rate, what can we see going forward on the research and development?

Yeah, you got to realize that we had about $1 million or so of R&D that we were doing for vehicle sensors that we now have divested. Since then have replaced quite a bit of R&D into iPerform activities and I envision that R&D to continue going forward. It perhaps would be premature for me to suggest that the Q2 would be a slow or let's say would be increasing or decreasing.

But we are in fact preparing our next fiscal year plan which we would be sharing with the board at the -- not this Board Meeting, the Board Meeting after in January, February. By then I would have a lot better feel, I would be able to share some of those highlights with the investors, what generally the R&D expenditure would be going forward.

But R&D expenditure is very important for us. We have seen already the benefit particularly at times that the market was light, we really did a lot of it to position ourselves for the growth and the products that generated from of those R&Ds are already paying off.

In general, I should mention though, while the top line growth is very important to us, so as the bottom-line. We love to be a profitable organization and as we go forward, I love to be able to see sort of a steady state in a few quarters that our overall expenditure as a percentage of sales actually reduces and that we would increase operating income to a tone of 10% or more as a percentage of sales. That is sort of a steady state condition that we are headed for. From time-to-time there might be a quarter that we might do more or less of, let's say it's sales and marketing or R&D. I hope that helps.

Yeah that was actually helpful. Your attitude towards R&D is important in a growing technology company. If I could ask just a little bit more than about iPerform.

Please sir.

Yes, is what you are going to be releasing I think you said first quarter next year, is that going to be a fairly completed system or is that going to be something that's going to continue to be need a fair degree of development over the future years?

The former. So in fact, at the moment, we are in the middle of a major deployment of iPerform in the Las Vegas area. So, our plan is that do additional deployments, when we release this early next quarter it is ready to shipped. It is ready to be installed and we plan on doing it in a very broad outreach.

This is really a product that in our view should change the dynamic of our market. It is a product that has not been available in the past, it is a product that not only the operators could use it, but also the administrators and managers and executives that you could actually let's say overlay a weather information system on traffic and make a prediction that in two hours what type of a travel patterns you would have and empowering the end-user to be able to make the proper choice.

So we feel very good about this product and we are investing a lot of time and energy and resources to really have this complete when it hits the streets. Of course, like any products, as we move forward we need to improve upon it or add other features as the market that demand did takes, no doubt about that. But, when it's ready early next quarter, we intend to have that installed in many agencies.

Great and thank you very much for taking my question.

Thank you sir.

And our next question does come from the line of Chris Biles with CJB Capital.

Good afternoon guys. Nice job. I just have a couple of questions. Specifically one of them has been answered already. Have you given the guidance on the forward quarter or a top line number as we move out over the year?

We have not given any guidance Mr. Biles, but, I could offer the following comments. The momentum that we are building in this quarter, we expect to continue, despite the fact that third quarter typically is a lighter quarter for us, because of the seasonal less construction and less product installation, we feel very good about our position at the moment. And I believe that this growth should continue.

We are executing our strategic plan. We have positioned the company to have products and services to take market share and really that is happening. So, I'm quite optimistic and perhaps even bullish in the upcoming quarters our opportunities going forward.

Thank you

Thank you sir.

And our next question is a follow-up from the line of Jeff Van Sinderen with B. Riley & Company.

Hi, this is actually the real Jeff Van Sinderen.

Thank you for joining us Mr. Van Sinderen.

It's a pleasure. Let me also add my congratulations on improvement in the quarter. Maybe you can just clarify any color you can give us on how much of the growth in the quarter was organic and how much was from acquisitions?

Sure. So MET added about $1 million and about $1 million came from organic growth.

OK, good. And then I know you spoke a little about in your prepared comments, but can you give us any more on your latest thoughts on how the new federal highway bill looking in terms of provisions that would benefit your business perhaps above and beyond the old highway bill?

Yes, Mr. Van Sinderen. It is very encouraging for us to learn that not only the bill is going to be held for discussion and of course we are enjoying the extension till end of March.

But the component that focuses on traffic management, the kind of work that Iteris does, that component of the bill is significantly higher expected to be higher than the years before. And the reason is perhaps two-fold. One, there is a broad understanding of the need for application of technology in the transportation in that, there are other studies suggesting that every $1 that you would invest doing a road lay or a capacity enhancements we might get back $1.50 or $2 in a way of ROI.

But when we do technology watch and managing our facilities, we might $7 or $8 back and in an environment that our organizations are trying to be efficient and be effective and astute about their expenditure, this is really a good business model. The other part of this is that, a variety of organizations have been advocating the application of technologies at local and federal levels.

I'd give you an example, I was couple of months ago in Washington DC and we had an organizational open house. We had numerous Congress men and women lining up to a speech about application of technology in transportation. So some of us have had the pleasure of dealing with some of them where there aids, we fully believe that a lot of that kind of funding is now reached in to the highway bill which ultimately would benefit companies like Iteris.

Okay. Great. And then two other things I wanted, maybe you could elaborate on a little bit. One was the 511 business and the other is the Vantage Vector business, if you can just talk about some of the opportunities you are seeing there or what you are focusing on in the near term?

Sure, on the 511, now together with MET, we have the privilege of serving nine states plus two major metros including Southern California. And we believe that this activity would expand first of all now together with MET we are considered a leader in this market.

So we anticipate gaining market share. The other interesting dynamic that is taking place is that, many of the agencies such as Virginia Department of Transportation that we just received that $10 million award are looking at opportunities other than the traditional -- providing service and giving the contractor an opportunity to perhaps tap on some other types of revenues that could be recurring revenues.

So we are looking at a variety of opportunities again not in any particular order, but there is advertising opportunities, there are branding opportunities, so various ways that we could actually provide more revenue for this particular business model. And the overarching just to expand on this a little bit, the overarching dynamic that is taking place, the information the dynamics of information overall in traffic management is really at the pivotal point.

So we have had data over the years in the last decade perhaps really mushrooming on us. The ability to take this data, analyze it, on real-time basis disseminated to a lot of the users empowering the users to be able to make a proper choice. That time is now, it finally has arrived and we intend to lead that market providing that information to the end-users that would have a tremendous value to them.

Of course, some of it is direct, some of it's through the agencies. And so, all of this 511, travel information, would all become a component of our iPerform offering that we are developing. And concluding of course as Mr. Reiss indicated, delivering it to market in the beginning of next year.

OK. Great. And then, as far as Vantage Vector, anything --

I'm sorry, that is so important. I'm surprised how I overlooked it. I was so excited about iPerform. All these wonderful things happening. So, Vantage Vector is truly an innovation that is changing again the dynamic of the market, retaining our leadership in this market.

For years and years, we have been working on video detection that is accurate, reliable. We have installed those perhaps over a 100,000 of those we have sold. Again we have some competition that we respect very much.

Together, I would submit to you that video is now the king of aboveground technology in detection. Having said that, there are many of our customers that have specific applications, some of them want to have what we call it dilemma zone, you know when you arrive at an intersection, you see the yellow and you want to ready.

Is this the time for me to stop or should I go through. So what we have done for the sake of time in this market, do a future fusion of video and radar. So video which is excellent to look at the intersection itself and perhaps up to about, let's say 400 feed or so. We want to be able to make the drivers safer, add safety, provide more richer data, so with radar we could now go and add couple of hundred feet to this and that's a crucial distance that truly helps many of the agencies to really provide that.

In addition to that, sometimes, although with the wide dynamic range camera that they have been providing, it could really help in galore, in far, in snow, radar, does a good job of some of those special situations as well.

So, what we have done is what radar is incapable of providing a full detection at intersection or beyond, and video has done an excellent job at the intersection in combination now, we could provide a seamless detection throughout the network something again, that not only would benefit Iteris.

But I also believe that it benefits the video detection market, expanding the pie even bigger for everybody. And for us to help our iPerform software as well, the most seamless information and detection that we could have the more accurate our system is the better predictive models that we could build.

Okay. Great. It seems like you have some pretty exciting technologies that you can really start to leverage going forward?

Well, well said Mr. Mr. Van Sinderen.

And I know there are some seasonal elements in Q3, but just wanted to clarify would it be feasible for revenues to be up in Q3? And also in Q4 and then what about profitability? Is it possible to have year-over-year improvement in profitability in Q3 and Q4?

Maybe you can give us an idea and then also how should we think about when you can start to leverage operating expenses? Could that start to happen in 2012? And then maybe any thoughts you have on what would be a reasonable operating margin target for your business?

Wonderful, I need to be very careful that in the height of my excitement I don't mention something to get in trouble with SEC. But first of all, I am quite opportunistic with the way we are going forward. Yes we do have that seasonality, what I could tell you with great confidence that year-over-year we would be growing double-digit in Q3 as well.

In Q4, that's little bit down the line, let me make those comments perhaps reserve it for my next call. But I do feel comfortable not only good but also in operating income, continue improving going forward. We will have a leverage for sure, it may take us a quarter or two.

We are really coming out of the divestiture on the vehicle sensors. We are finalizing our integration with MET. We are going to a little bit of a transitional on that, but we are still quite efficient and I do feel that from a percentage of sales, the operating expenses should stay flat or actually improving. I hope that helps.

No, that definitely helps. Thanks very much and good luck for the rest of this quarter.

Thank you Mr. Van Sinderen.

And at this time, this concludes our question and answer session. I would now like to turn the call over to Mr. Mohaddes for his closing comments.

Thank you very much. We appreciate everyone's support and thoughtful questions and we look forward to updating you again on our continued progress. Thank you, all.

Thank you very much. Again ladies and gentlemen, I would like to remind everyone that this call will be available for a replay via telephone through November 10, 2011 starting at approximately 7:30 PM Eastern Time today. Please follow the instructions in today's earnings release. An audio webcast of this call will also be available for replay via the Investor Relations section of the company's website at www.iteris.com. This concludes today's call. Thank you ladies and gentlemen for joining us for our presentation.