Iteris Inc (ITI) 2013 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 this fiscal third quarter, ended December 31st, 2012.

Joining us today, are Iteris' President and CEO, Mr. Abbas Mohaddes and the Company's CFO, Mr. Jim Miele.

Following the remarks we'll open up the call for your questions. Before we continue we would like remind all participants that during the course of this call we may make forward-looking-statements regarding future events or the future performance of the Company which are based on current information, are subject to change, and are not guarantees of future performance. Iteris does not undertake any obligation to provide updates to these forward-looking-statements in the future.

Actual results may differ substantially from what is discussed today and no one should assume that at a later the Company's comments from today will still be valid. Iteris refers you to the document that the Company files from time to time with the SEC, specifically, the Company's most recent Form 10-K, 10-Q and 8-K which 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.

I would 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.

Now, I would like to turn the call over to Iteris' President and CEO, Mr. Abbas Mohaddes. Please proceed.

Thank you, [Michaela], and good afternoon, everyone. As you saw at the close of the market today we issued a press release announcing financial results of our fiscal third quarter ended December 31st, 2012.

In our third quarter we experienced a decline in Roadway Sensors revenues primarily due to the delay of certain orders and East Coast shipping disturbances resulting from Super Storm Sandy.

While I'm disappointed with the financial results of this segment we remain encouraged by our $3.2 million Roadway Sensors backlog and we received the strong bookings in the early part of our fourth quarter. We continue to believe there is a strong demand for our core Roadway Sensors products as well as our innovative solutions like Vantage Vector and the recently announced SmartCycle and SmartSpan.

Transportation Systems contract revenues were flat year-over-year primarily due to the timing of a key contract in the prior year period. However, this segment is well positioned to capitalize on the recently-passed Federal Highway Bill, as demonstrated by our selection by the Federal Highway Administration.

As we have discussed previously, the government and commercial markets for real-time, actionable traffic and weather information analytics, are expanding rapidly. We are participating in this emerging market by investing in the people, products, and services within our iPerform segment and are encouraged by the $3.3 million of backlog.

In spite of the challenging third quarter, our overall business outlook remains strong as we continue to strengthen our foundation with software-based traffic management solutions. We are committed to further expanding our sales, marketing, and research and development teams, particularly within iPerform, and anticipate announcing further developments in the coming quarters.

But before going in to further detail about the quarter as well as our outlook, I would like to turn the call to over our CEO, Jim Miele, who will take us through the details of our financial results for the quarter. Afterwards, I'll return to discuss some more of the highlights for the quarter and how we plan to build shareholder value as we continue to move through fiscal 2013 and beyond.

Finally, we will open the call for your questions. Jim?

Thanks, Abbas, and good afternoon, again, everyone, and thank you for joining us today.

For the fiscal third quarter ended December 31st, 2012, total revenues decreased 6% to $14 million compared to $14.9 million in the year-ago quarter. Please note that our prior -year results have been restated to reflect the divestiture of our Vehicle Sensors segment in July 2011. The decrease in revenues was primarily due to a 23% year-over-year decrease in Roadway Sensors net sales for the reasons Abbas noted.

As there are different characteristics affecting each of our revenue streams and various 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 third quarter was 36.8% compared to 36.7% in the year-ago quarter. Gross margin was impacted in both the third quarter and year-ago quarter by a shift in mix toward Transportation Systems and iPerform contract revenues, which typically provide a lower margin than the Company's product revenues. And to a lesser extent a slight decline in Roadway Sensors gross margins as a result of lower sales volumes. Even with the lower sales volumes our Roadway Sensor segment still provided a gross margin of 50%.

Operating expenses increased 9% to $5.6 million compared to $5.1 million in the year-ago quarter. The increase was primarily due to $133,000 charge associated with the change in fair value of contingent acquisition consideration, whereas in the year-ago quarter we reported a $281,000 benefit.

SG&A expenses as well as R&D investments in the third quarter were flat when compared to the prior-year period. Our net loss from continuing operations was $294,000 or $0.01 per share in the third quarter, compared to operating income from continuing ops of $618,000 or $0.02 per share in the year-ago quarter.

Net income was $1.1 million or $0.03 per diluted share in the third quarter, compared to $747,000 or $0.02 per diluted share in the year-ago quarter. Net income in our third quarter of 2013 included an after-tax gain of $1.4 million related to deferred payments and earn-outs earned from the sale of our Vehicle Sensors segment in July 2011.

This acquired the gross receipts of $1.8 million in cash. Earn out payments n the Vehicle Sensors sale are meeting our expectations thus far. Cash at December 31st, 2012 was $19.7 million compared to $18.7 million at March 2012, and we continue to carry no debt.

We repurchased approximately 388,000 shares of our common stock in the third fiscal quarter of 2013, bringing the total to approximately 1.4 million shares since our repurchase program was initiated in August 2012. That program has since expired, and a new $3 million share repurchase program was initiated in August 2012. As of December 31st, 2012, we spent approximately $2.1 million through the stock buy-back programs.

Finally, total backlog at the end of the third quarter was $38 million which included Transportation Systems backlog of $31.5 million, iPerform backlog of $3.3 million and Roadway Sensors backlog of $3.2 million. This compares to total backlog of $32.9 million in the year-ago quarter and $41.2 million in the previous quarter.

This concludes my prepared remarks on the financials, and now I'd like to turn the call back over to Abbas, who will further discuss the quarter as well as our strategy as we wrap our fiscal 2013. Abbas?

Thanks, Jim. As I indicated in my opening remarks, softness in our Roadway Sensors business was the primary reason for our decline in total revenues during the quarter. We experienced a delay of certain orders especially on the East Cost due to Super Storm Sandy.

A few orders were delayed in California due to construction interruptions and certain agency funding issues. However, our outlook for this segment remains strong as our products continue to be in high demand. For example, we are experiencing traction with our Vantage Vector product and we are receiving favorable feedback from our early adaptor customers.

We believe the introduction of new products should help sustain our market leadership. An example of such leadership is the two new products I mentioned in my opening remarks, SmartCycle and SmartSpan. Both bolster our Vantage product suite, address unmet needs in the marketplace and further support our market-leading position with more than 100,000 video detection sensors in operation worldwide.

So far in January Roadway Sensors bookings are up 41% year-over-year. We expect the Roadway Sensors business to resume growth as we continue channel building and product development and launch efforts.

Our Transportation Systems sales were flat during the quarter primarily due to a cheap project experiencing high sub-contract work in the prior year. We signed $4.9 million in new contracts during the quarter, bringing our contract backlog to $31.5 million compared to $29.7 million in the year-ago quarter.

We continue to believe this business is well positioned to capitalize on the recently-passed Federal Highway Bill. For example, during the quarter the Federal Highway Administration selected Iteris to provide on call task-order-based services for two five-year contracts valued at up to $80 million. We will be competing with a small group of other selected providers and expect several task orders to be awarded over the next few quarter.

This selection is a testament to our strong relationship with Federal Highway Administration, the expertise of our team and the impact the intelligent traffic technologies can have on improving congestion.

We are beginning to see more requests for proposals from various agencies due to the Highway Bill. As we have indicated before we believe to be a direct beneficiary of the bill and it should impact our revenues in the upcoming quarters.

We continue to make substantial progress in Traveler Information 511, which provides real time traffic information systems that help commuters take optimal route, subsequent to the quarter's end, we were selected by South Carolina to develop, implement and operate its 511 Travel Information system.

The three-year contract valued at approximately $2.5 million includes two one-year options for ongoing operation and maintenance. We believe Iteris remains the market leader in 511 as we now operate 12 estate agencies and five metro areas. We are pursuing several other similar programs in various estates, and remain optimistic about the prospect of expanding our presence.

Our Performance Management segment or iPerform, continue to make significant progress during the quarter. As you may recall the iPerform group is focused on Performance Management solutions that provide customers with world-class traffic information services that include our data service products, analytics and visualization applications, as well as our predictive service offerings.

Our market-leading product, Iteris PAMS, or IPAMS offers analytic applications that provide real time actionable traffic information that allow traffic analysts, engineers and media producers to manage the traffic information demands. During the third quarter we experienced significant customer interest and explored various commercial opportunities in the media, automotive and mobile application markets.

We are in early discussions with several companies that are particularly interested in our software, predictive weather and traffic data functionality and plan to announce further details in the upcoming months.

Also during the quarter we continued our investment in iPerform research, development and sales capabilities for new market expansion. We also hired key data scientists and software engineers to augment our existing development capabilities.

We made and will continue to make these investments as we anticipate significant growth from this business. As the market for data services and analytic applications continues to increase at a rapid pace, we believe both public and commercial opportunities will expand significantly over the next five years.

We also believe we can capitalize on our technological investments, experience and market leaderships to leverage Iteris into a unique leadership position. Our bullish view stems from A, the government's increased emphasis on accountability in transportation infrastructure expenditures as substantiated by the new Highway Bill, and B, increase in commercial market demand for real time, predictive traffic and weather information services.

While our near-term focus remains on delivering our software to public agencies, we plan to capitalize on our existing intellectual property and application infrastructure to provide new data and application services for traffic information services in the media, automotive and consumer application markets.

We plan to provide IPAMS as both license and software as a service offering, and expect software revenues from this initiative to maintain a higher marginal structure as compared to our base business.

Now, before I provide my closing remarks, we will be delighted to respond to your questions and comments. Operator?

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions).

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

Good afternoon. Abbas, maybe you can talk a little bit more about Roadway Sensors in terms of whether the Sandy-related business was simply pushed out in terms of timing. Do you see that starting to come back now? Eventually that business should come back, right? Then, also maybe you can talk about the funding issues in California and when you see those starting to free up?

Yes, thanks, Mr. Van Sinderen, as far as the orders related to Sandy, yes, we do believe that those would come back. It is a matter of time. Our sales force believe that some of those may come back in fact, in this quarter fairly quickly. So I don't believe that the business overall is lost or rather moved to the right.

Regarding California funding issues, you may recall that not too long ago, the State of California relinquished the existence of the redevelopment agencies whom used to provide significant funding for capital improvement projects for local agencies.

Many of the agencies are identifying new funds, we now know that the state -- funding overall is improving, so we envision that that business to be recaptured. In fact, we had one large order that has been lingering for a few quarters, we just recently learned that for a magnitude of $0.5 million or so, is lined up to be shipped this quarter.

So although we remain cautious about the financial health of the State of California our outlook is such that it should be stable in the upcoming quarters.

Okay, that's good to hear. Maybe you can update us on the latest you're seeing in iPerform and what the outlook is for that segment. I guess one of things I'm wondering, is how fast you expect that to grow? And then you mentioned some new developments, I think related to iPerform and some of your software, maybe you can elaborate on that a little bit too.

Sure. So we have been spending a tremendous amount of time and energy investing, exploring the markets, particularly the commercial market as of late. While we believe there is a significant demand in the public agency customers that we have, and expanding those, we also feel that the IP and the services that we provide are also in very much high demand in the commercial market, in particular media, automotive, and we have been testing, having discussions with many of the agencies, and organizations in those markets, and believe that that market is expanding tremendously.

So that would come in the way of the data services, in the way of the analytics application that we would be providing, and we're presenting, as a matter of fact, in a couple of weeks, to our Board of Directors, our next fiscal year plan. I would envision that there are some significant activities and growth that we envision going through that also requires investments going forward that we, more likely, would have a special session, a special announcement on that in the upcoming weeks or next few months, to really share that with the investor community.

Overall, we feel quite excited about it for several reasons, and not just that we see a growth in our core public agency business that we already have, and as I indicated have over $3 million of backlog, expanding on that, but also pursing and entering the commercial market could be -- we truly believe that it's a significant growth for us going forward. We envision offering various features specific and services along those lines, but permit me to expand on it -- on a separate announcement and be delighted to discuss it more at that time.

Okay, great. And then also, I'm just looking at your backlog and it's fairly sizeable, when do you think that we'll start to really see a ramp in the systems revenue from this new Federal Highway Bill? I know there's somewhat of a lag there and sometimes contracts are subject to push-outs and so forth, but any sense you can give us on what you think the timing is in terms of when we will see that in revenues?

You know, I would be disappointed if we didn't begin seeing a ramp up on that, let's say, starting next quarter and the quarter after, more likely during the summer quarter we should really see those as material impact on our revenue. It has been a bit slower than expected, but that is not a total surprise to us in a way that that particular funding has been working over the years.

Okay. And then you also mentioned, I think, two $80 million -- or a total of, I guess, $80 million contract, when -- I think you said five-year contracts?

Yes.

I'm just wondering if you can talk more about that, and I'm wondering how much of that $80 million would be feasible, or do you think is feasible, for you to have a shot at winning?

Sure. Well we have a shot of winning, hopefully, all of it. Although we have to compete with a handful of others we are already seeing task orders coming in, and so I would envision that, again, in the upcoming quarters, we see the impact of that revenue. We put together a very strong team, and compete for that work with many other entities and we feel very good about our chances of getting a significant amount of that work.

Okay, good. So overall, let me ask you so when you think about your business in sort of a consolidated basis over the next 12 to 18 months, what do you think is a reasonable revenue growth rate to contemplate at this point? Then also, maybe you can just touch on how you would see gross margins as the next few quarters progress and then expense levels as well?

Sure. We typically don't provide a guidance, but I could share this with you, that with everything that is going on and things ramping up with the influence of iPerform, I would envision that as we move forward, our annual growth should certainly be in the double digit and even get healthier as we go forward.

In the way of margins, as we kick in more of a software based activities, the margins should improve. As far as the cost basis, one of the good things that is happening, this program that we have had the operational excellence at Iteris is that we are able to leverage quite a bit of infrastructure, so I don't see at all, for example, the G&A as a percentage of sales ramping up to the extent that the sales growth we would be experiencing year-over-year, if you know what I mean.

Sure.

So we could leverage that quite a bit, which means that we would be expecting expanded operating income as a percentage of sales, of course we would be discussing our investment -- expanded investment in iPerform. But I would envision that much of this expansion would not have a significant adverse impact on our overall operating income, and that I would expect our overall operating income, certainly not going into negative in the foreseeable future, but rather, as we go forward in, let's say, year two and beyond they are significantly expanding.

Okay. That's great to hear. Thank very much. I'll let someone else jump in.

Thank you.

Thank you. And the next question comes from the line of William Myers from Miller Asset Management. Please go ahead.

Hi. Thank you. Do you believe that there's any impact from the fiscal cliff fiasco of the last quarter, or did you not see anything from that?

Mr. Myers, I have a tough time really speculating and quantifying the kind of impact. It is conceivable that some of the orders, contractors, or perhaps agencies are wondering about their budgetary issues. Whenever we have those financial crises, if you will, I personally got to believe that there is some impact. Although, like I said, would be very hard to quantify.

But you guys --.

But the good news is that we are seeing a significant ramp up. I mentioned 41% in January, year-over-year bookings, that's quite encouraging, which tells me that that more likely was an anomaly and we ought to be able to resume our shipment the way we expect it.

Okay. Good. And the only other question I had was on labor cost. Did you see any increase in your labor cost in 2012 and would you anticipate any increases in 2013?

Nominal increase. The cost of living raises that we get, plus some hirings that we have done. So going forward I would envision that by and large the majority of the labor additional costs would be attributed to the software engineers scientists and the like that we would be hiring.

I would envision minimal in the G&A, but perhaps also some in sales and marketing, so that would be the extra cost and we haven't really finalized our annual plan. It will be done in a couple of weeks and I'll be happy to share some more on that at the next call as we go forward. But I don't see that as a significant increase though.

Okay. Just thought I'd check. Thank you very much.

And thank you.

Thank you. (Operator Instructions). And your next question comes from the line of Chris Biles from CJB Capital Management. Please go ahead.

Hi. Good afternoon, guys. I have a couple of questions, the first of which, on the $20 million in cash. Can you talk about potential acquisition targets or investment sort of use of that current balance as it relates to growth or opportunities you might be seeing?

Yes, Mr. Biles. Of course as far as the acquisition and we have been mentioning in the previous call as well, we are in the acquisition mode identifying targets, looking at the companies and firms that specifically could enhance our technologies. We are looking at the firms that have an IP that could be very helpful for us, particularly in the software-base, there're activities that we are doing. So absolutely, that's one of our key strategic opportunities that we are pursuing.

Okay. Speaking of opportunities or acquisitions, I noticed that on December 28, FLIR Systems acquired Traficon out of Belgium for what appears to be $46 million. Do you have any idea what revenue or multiple of revenue they paid and do you consider -- did you consider Traficon a direct competitor, or were you seeing them in markets in Europe or anywhere else?

Yes. I respond to the latter part. Yes, we see Traficon as a competitor, and they not only have been strong in Europe, but also here in US, they have been selling quite a bit of their products, and we certainly took a note of that acquisition.

I would just speculate that it was probably in round numbers two times sales, although we don't have any direct access to their revenues, this is just our pure speculation, if you will. And we see that as a positive thing in our industry. I think it stems from FLIR's commitment to the traffic management market, and they have been and will be a strong player in this market and we, of course compete with them.

Okay. Another date from the past that I'd like to sort of check up on. On May 22 you announced collaboration with INRIX, and INRIX seems to be in the news quite a bit of late. Can you elaborate on the nature of that collaboration or how things are going?

Sure. We worked together on certain agencies that require data from INRIX, we worked with them to make sure that their data and analytics that the applications that we provide could be well integrated and watched, example of that collaboration is State of Virginia where we are providing travel information and they have purchased data from INRIX.

We also, not only collaborate with INRIX, but we envision also to compete with them as INRIX has been very strong in data and providing data, we see them now per some of the announcements that they have had is that they are moving into analytics and applications and we are conversely -- our strengths have always been n analytics, and its application.

The data price is coming down, and so we are planning to penetrate into that market. So I would envision that at times we would be competing, at times we would be collaborating. Again, this all stems from the health and anticipated significant growth in this particular market.

Okay. You also announced earlier on in the call or in the press release buyback of approximately 390,000 shares. Can you give me a number on what might be remaining, dollar-wise, on the $3 million buy back that you announced back in the fall?

Yes. I let Jim to expand upon it. Jim?

So the number in the release and the number that I commented on was $2.1 million, that was accumulative number on both plans. So without having the number in front of me for the second plan, that is probably roughly in the neighborhood of $2 million remaining.

$2 million remaining.

In the neighborhood. Subsequent to the December quarter we have continued to repurchase through a 10b5-1 Plan as well.

Okay. My last question and then I'll hop out of the way. I'm curious how the board and how management is discussing valuation of the Company when you've got a company like Traficon being acquire for what appears to be, in your words, approximately two times revenues, and you traded 65% on an EV to sales basis. There seems to be some sort of disconnect in the marketplace. Can you comment on that?

Sure. We all, very much, concur with you, with that observation and it is quite obvious that we are doing everything we can in various fronts to really accelerate our growth and doing all the right things so that the market would notice, to be able to give us the proper valuation. I know it is easier said than done, but that is an area that we focus and discuss of course quite a bit.

Thank you.

And thank you, Mr. Biles.

Thank you. And at this time I'm showing no further questions in my queue. I would like to turn the conference back over to Mr. Mohaddes for closing comments.

In closing. We continue to believe Iteris is solidly positioned to go after the intelligent traffic management market due to our focus on a specific segment within this market, we believe are growing much faster than the traffic industry as a whole. These include Traveler Information 511, and iPerform, both of which involve the application of technology to deliver intelligent, actionable traffic information to traffic management operators and the traveling public.

As we continued to deliver technology-based products and software solutions to the marketplace like Abacus and IPAMS, we would expect our overall gross margins to gradually improve. We will also remain optimistic in our acquisition of strategy and plan to continue to look to acquire companies that either enhance our IP or position us in a new geographic location.

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

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