Iteris Inc (ITI) 2014 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 our fiscal third quarter ended December 31, 2013. Joining us today are Iteris' President and CEO, Mr. Abbas Mohaddes and the Company's CFO, Mr. Chuck McBride. Following their remarks, we will open the call for your questions.

Before we continue, we would like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the Company, which are based on current information, are subject to change and are not guarantees of future performance. Iteris is not undertaking and 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 date, the Company's comments from today will still be valid.

Iteris refers you to the documents that the Company files from time to time with the SEC, specifically the Company's most recent Form 10-K, 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 Investors 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. Sir, please proceed.

Thank you, Cheryl, and good afternoon, everyone. As you saw at the close of the market today, we issued a press release announcing the financial results for our fiscal third quarter ended December 31, 2013. Overall, we were pleased with our performance for the third quarter. Our revenue of $16.5 million was up 18% from the same quarter a year ago and operating income of $300,000 improved $700,000 from the same quarter a year ago while we continued our accelerated investment in iPerform.

During the quarter, we continued to expand our Roadway Sensors business domestically and internationally and with OEM products. Our Transportation Systems and iPerform businesses continued to track reasonably well to our plan.

For those of you who are new investors, we separate our business into three segments -- Roadway Sensors, Transportation Systems and iPerform. We have established target growth and operating margins for each of these segments. The Roadway Sensors business model is primarily a product business. We target growth and operating margins of 45% and 15%.

The Transportation Systems business model is primarily a consulting business. We target growth and operating margins up 35% and 15%.

The iPerform business model is primarily consulting business today, but we plan to expand into software as a service into commercial markets; therefore, our target growth and operating margins are 60% and 15%. These targets reflect our long-term goals for each of our business segments.

For today's call, Chuck will walk us through the details of our financial results of the third quarter. Afterwards, I will discuss some highlights about the quarter, provide our outlook for the business as we move into the fourth quarter and then we will open the call for your questions.

Before passing the call over, I would like to welcome Chuck to his first call as CFO of Iteris. Chuck brings over 30 years of exceptional financial leadership and a proven track record of helping companies increase shareholder value. He has extensive experience across both public and private technology companies and demonstrated his management abilities in a variety of high-level financial and operational roles.

Chuck shares our vision of growing Iteris into a highly profitable market leader in the intelligent traffic management market. With that, I would like to turn the call over to Chuck. Chuck?

Thank you, Abbas, I appreciate that. Good afternoon. I'm delighted to join the team at Iteris and I am looking forward to getting to know you, our shareholders and analysts. As many of you know, early in the year, we aligned our business -- our organization with our business strategy. Therefore, we provided pro forma comparisons of revenue and segment income in our press release.

During the third quarter ended December 31, revenue increased 18% to $16.5 million compared to $14 million in the same quarter a year ago. The increase was primarily attributable to a 45% increase in Roadway Sensors, a 6% increase in Transportation Systems, partially offset by an 8% decrease in iPerform.

Gross margin in the third quarter was 37.4% compared to 36.8% in the same quarter a year ago. The 60 basis point increase was primarily the result of a shift in sales mix weighted more towards higher sales of Roadway Sensor products, which typically carry higher margin than other segments. Overall, gross margin dollars grew to $6.2 million from $5.2 million for the same quarter a year ago.

Roadway Sensors margins declined to 48.4% in the current quarter from 49.9% reported in the same quarter a year ago, primarily due to our increased sales in third-party OEM products at lower margins. The overall higher revenues in this segment largely drove our higher gross margin in the quarter.

Transportation Systems margins were flat at 26.7%. iPerform gross margins were approximately 37.3%, which represents a decrease of 240 basis points from 39.7% reported in the same quarter a year ago, primarily due to contract mix.

Operating expenses increased 5% during the quarter to $5.9 million compared to $5.6 million in the same quarter a year ago. The increase was primarily due to planned increases in sales and marketing and accelerated spending in iPerform.

Operating income in the third quarter decreased to $309,000 compared to a loss from operations of $427,000 in the same quarter a year ago. Net income in the third quarter was $238,000 or $0.01 per share compared to net income of $1.1 million or $0.03 per share in the same quarter a year ago, which included a $1.4 million gain net of taxes related to the sale of the Company's vehicle sensor business in July of 2013.

Cash and cash equivalents was $20.5 million compared to $19.7 million a year ago and we have no bank debt. Backlog at the end of the third quarter was $36.8 million compared to $38 million in the same quarter a year ago. Backlog was comprised of $28.6 million for Transportation Systems, $4.4 million from iPerform and $3.8 million from Roadway Sensors. Transportation Systems and iPerform backlog declined 5.2% due to timing of new orders, partially offset by a 19% increase of Roadway Sensors. Now I'd like to turn the call back over to Abbas. Abbas?

Chuck, thank you very much. As I indicated in my opening remarks, we experienced a strong growth from our core businesses. Both Transportation Systems and Roadway Sensors remain on track with our internal growth plan. The operating profits from these segments provided us with the cash flow necessary to continue fueling our investment in iPerform.

Before I speak more about our outlook, I would like to discuss our operating segments in more detail. As Chuck indicated, Roadway Sensors sales are up 45% to $7.3 million compared to $5.1 million in the same quarter a year ago, primarily due to the success of various growth initiatives developed earlier in the year, which included increases in our international sales and OEM distribution products and the delay of certain customer orders in the prior-year period.

We've also been gaining traction in some of our key products such as our Vector product, the very first hybrid detection system introduced to the market, which uses both video and radar. Our innovative products such as the SmartCycle, SmartSpan and Velocity continue to gain traction as we believe they solve real-world customer needs. We expect to continue to grow internationally and during the quarter, we signed new distribution agreements in Latin America and the Middle East.

Our Transportation Systems sales were up 6% during in the quarter primarily due to higher contract volumes. During the quarter, and in part due to the federal highway bill, we saw more requests for proposals indicating the funds are starting to flow. A few notable system contract awards included a $2.2 million contract to provide a bus signal priority system for Torrance Transit's Rapid Line in Los Angeles County. We are providing a multi-jurisdiction bus traffic signal priority system at 83 signalized intersections. This project expands on established operations throughout Los Angeles County and should grow our nationwide presence and utilize existing bus system technologies to mitigate traffic congestion.

We've also [ordered], along with two other firms, a five-year indefinite delivery, indefinite quantity contract for traffic design and operation training services from the Federal Highway Administration. The Federal Highway Administration has budgeted a ceiling of $17.7 million for the five-year training program. Our selection reflects our continued leadership in the transportation industry.

Over the years, we have had a significant track record of developing and conducting training that utilized our advanced learning and instructional system design techniques. The Federal Highway Administration and National Highway Institute selection of Iteris highlights our capability.

Moving onto our Performance Management segment or iPerform, we continue to make progress in achieving advancements in developing our predictive weather and traffic platforms while expanding our team of professionals. During the quarter, we continued to grow our marketing and software engineering staff, bringing our iPerform group to 68 total professionals. iPerform is the leader in performance management solutions in the public marketplace. [There are] solutions at our agencies to make better decisions that saves time, fuel, and (inaudible) and help make our road networks safer and more efficient.

We are planning to leverage our knowledge and experience in the public traffic and weather solutions into commercial markets. Our plan is to continue investing in technical and market development. We believe iPerform solutions have commercial applications in media, automotive, fleet management, operations and maintenance, agricultural and the utility markets.

Our commitment to iPerform is due to our belief that the market for traffic and weather analytics is expanding dramatically. We plan to continue to fund these investments through internally generated cash flow from our existing businesses.

Last year, we established several milestones that investors could follow to monitor our progress in iPerform. They included a robust graphical user interface, the integration of current and historic road and weather conditions, arterial performance management capabilities and a statistical predictive analysis for traffic, road and weather conditions.

Since then, we have released new innovative visualization products -- MAP-21 performance measurement tools, integrated additional types of information, including real-time traffic incidents, road and weather conditions, as well as traffic and weather prediction systems. We also have filed several new patents around our software's predictive analysis application. Further, we made advancements in developing our predictive weather and traffic platforms. These advancements included the introduction of our ClearPath weather product and we have two customers conducting beta tests on our software solution.

Our Performance Management solution items released enhanced analytics, supports to help the state agencies better manage their statewide road networks. We also expanded our ClearPath incident coverage, which now supports 50 metropolitan markets in more than 25 states.

Finally, as you may have seen this morning, we have entered into a global reseller agreement with Tinga Inc., an earlier stage company that has a cloud-based marketplace that gives investors on-demand access to financially actionable information and reports. Under that agreement, Tinga will sell Iteris' traffic and weather information products and services to Tinga-registered investment advisors and customers through Tinga's AIR Exchange online marketplace.

This agreement with Tinga demonstrates the need for our traffic and weather solutions in markets outside of transportation and global investors who seek relevant information to make investment decisions will soon have direct access to purchase Iteris products and services through their Tinga AIR -- through the Tinga AIR Exchange online marketplace.

This is important to many investors such as commodities traders because traffic and weather information is a key component of investment analysis and decision-making. We look forward to working with Tinga and being the first in the traffic and weather management market to leverage these services.

As the market demand for better informational and analytics tools continues to expand, we believe the investments we are making today will highlight Iteris as a market leader in the intelligent information solutions market. Now, before I provide my closing remarks, we will be delighted to respond to your questions and comments. Cheryl?

(Operator Instructions) Jeff Van Sinderen, B. Riley & Co.

First of all, let me say congratulations on the year-over-year improvement. Abbas, maybe you can give us a little more detail on the new Tinga partnership and how that will work for you. Maybe frame for us what kind of revenues you expect that to generate and where you stand on adding other partnerships like this.

Thank you for the question, Mr. Van Sinderen. Yes, so Tinga is an earlier stage organization in the financial marketplace that has forged various relationships to provide investors and that community with specific traffic and weather information. The example that I used in my [original] remarks is the commodity folks that they make their decisions on futures of commodity prices. As you know, it is quite sensitive really on a very short period. So the more information that they have on an accurate weather and traffic, it is quite useful for them.

And just to briefly expand on some of the features of ClearPath weather is that we get information from the national weather that is typically 10 to 12 kilometers accuracy. Now what we do is that we apply analytics to turn that into 1 to 2 kilometer accuracy. With that, we could predict weather conditions in a predictive manner for a very small section of the roadway or a field or a cornfield, let's say. To the extent that you could provide that accurate information a little bit more accurate, that has a significant value for that market. You could imagine many others benefiting from that.

So that's the relationship. We have not at this point announced any financial magnitude with them, but they have a clear arrangement and agreement in the way of their rev gen model.

Okay and is that -- go ahead, sorry.

As you indicated, we are in discussion with other potential partners that could deliver within the transportation industry and perhaps outside of transportation industry, as I indicated, such as agriculture, for example. We feel that our products and services have a tremendous value outside of the public sector that we have enjoyed for many years and now to be able to offer that into the commercial marketplace.

Okay, I was just going to ask you is the Tinga product -- does that have a mobile application?

To our knowledge, they have a (inaudible) portfolio that includes online services to a variety of customers. I don't know specifically about their mobile application (inaudible) for example, but I would expect that it is the most common arrangement that they provided to the financial industry.

Okay, got it. And then maybe you could talk a little bit more about what's driving Roadway Sensors. You had pretty strong growth there; I think up 45%. Should we expect that to moderate down going forward. Obviously, 45% we wouldn't expect to continue forever, but maybe you can just give us a sense what sort of growth you think we should think about there. And then maybe you can just speak to also the broader outlook for iPerform. A couple of different questions there.

Sure, sure, I'm just quickly recording that. So regarding Roadway Sensors, a 45% year-over-year increase, that really was a twofold impact. One, about a year ago, you might recall that we went through a tough quarter. We had Superstorm Sandy that hit us and as a result of that, a handful of contracts moved to the right. So that adverse impact really was hard for us in that quarter. We could only generate about $5.1 million worth of revenue.

In addition, we began to focus on our activities and came up with a list of about a dozen specific initiatives. These range from expansion of our international markets, to enhancements of some specific domestic products, to enhancements of product support and so on.

We are quite fortunate that those initiatives are now really paying off and we're seeing the benefits of that. And so I would anticipate that our investment and strategic maneuvering that we have done in Roadway Sensors to continue responding and to continue to grow.

Regarding the iPerform, we are quite pleased with achievements that we have done during the Q3 and in fact since the beginning of the fiscal year. And we would expect to continue expanding and continue our investment and achieving various milestones both in technical, as well as partnerships. And these are two significant areas that we indicated to investors in prior calls that we would continue doing and we are on track to do so.

Okay, that's great to hear. When do you think we will start to see the inflection point, in other words, for iPerform to return to revenue growth? Do you think we will start to see that over the next couple of quarters?

So the types of services that we are providing in iPerform are twofold. One, it is the activities that we have had primarily in traffic, their performance measurement and [better] with the software and products that we have, that they are primarily consulting activities, if you will. And that would continue and we expect that to grow.

And then there is the predictive services that will take us a few more quarters to develop. So I would expect at some point during our next fiscal quarter and beyond, we begin to see that inflection point. So it will take us a bit of a time. However, we would expect, as I indicated, some traction based on the existing and some of the partial achievements that we are making such as the Tinga relationship as an example or things -- arrangements like that that we could in fact leverage our publications and products into the commercial. I hope that helps.

No, that helps a lot. And then, finally, I wanted to ask you about systems. It's great to see systems growing. I'm just wondering how we should think about that segment going forward in terms of the federal highway bill. It sounds like you're starting to see dollars flow from that. And should we anticipate a similar growth rate? Do you think that would accelerate going forward? Maybe you could just touch on that and the federal highway bill and also maybe on how the portion of subcontract work is trending. That would be helpful.

Yes, sure. So Transportation Systems is certainly getting help from the federal bill. We have seen, in this particular quarter, expansion of the federal funds into local, state and of course, federal agency and some of the announcements that we've had are an indication of that. So, we have seen expanded number of requests for proposals. We have added professionals to respond to that kind of demand. So I would expect the Transportation Systems to continue taking advantage of that in the marketplace.

We also see, again, this is both for Transportation Systems and Roadway Sensors, more constructions. It appears to us that the real estate market is coming back a little bit and we are a beneficiary of that as more construction takes place. We expect to see more new traffic signals, which typically require detection. So all of that really makes me to feel cautiously optimistic, if you will, about going forward with the Transportation Systems.

Okay, great. And then maybe you can just touch on gross margin? Gross margin was actually a little better than last year, I believe, but a little bit below what it was in the prior quarter in Q2.

Yes, year-over-year, it was flat. We do fluctuate on a quarterly basis and I'm going to respond also to one other question that you asked, which had to do with the subconsultant magnitude. So it fluctuates depending upon the type of contract, if it is cost plus, fixed fee or lump sum and then the magnitude of the stocks that we have. As you know, with that fluctuation, lots of times, we may not be able to enjoy a good wrap around the subconsultant content. So that fluctuates from one quarter to the other.

Overall, I have not felt that our gross margin has experienced any material deviation from what we have been enjoying over the last let's say four to eight quarters.

Okay. And then you were going to -- I know you were going to talk about subcontract. Did you want to talk more about that or has there been a trend or --?

Sure, I'll expand on that a little bit. So this quarter, we have had a good magnitude of subconsultant agreements and because of some of the larger contracts that we have, that trend may continue perhaps for a quarter or two. Beyond that, it would be hard to really have much more visibility. But since a couple of years ago when we began doing more travel information, 511 projects, system integration projects, we are quite fortunate to enjoy larger contracts and then with that comes them some good subconsultant content and as a result of all of that, enjoyment of better revenue growth.

Okay, good. And speaking of revenue growth, Abbas, in Q4, would it be fair given the trend that you are seeing for us to expect revenues to grow year-over-year in Q4? I'm just wondering also if we should be looking for your bottom line to grow as well in Q4.

Well, let me put it this way, I would be very disappointed if we didn't continue to grow sequentially from this quarter to the Q4.

Okay, great to hear. Thank you so much and best of luck.

And thank you very much and I appreciate your questions.

Steve McManus, Sidoti & Co.

So can you guys expand upon some of the progress in international sales? What are some of the key product developments in the Roadway segment with respect to those new contracts in Latin America and the Middle East?

Yes, sir. So one of the key things that we did again as part of our growth initiatives about a year ago, we focused a lot more on the international products in a way of responding to the specific needs of the two key geographies that we are pursuing, namely Latin America and the Middle East. And to that end, we have been quite responsive to the specifications and the international standards exercised in those markets. And that has helped us quite a bit.

So in this quarter, as an example, we had a good component, close to $1 million worth of international revenue that we enjoyed. And at the same time, as I indicated in my prepared remarks, we are expanding our presence, our distribution channels, our personnel that are pursuing that market. So this is part of our initiative to really focus and respond to the demand of the specific markets in those two areas. Thanks for the question.

The last time we spoke, you mentioned the Pico line being one of the key products for international sales. Is that still the focus or is there any new products in the pipeline?

It really is and Pico, sometimes we refer to it as PECAN, is a key product for us for international markets. It is really designed for the types of intersections and the detection requirements of much of the international markets and it is priced appropriately again to respond to those demands. Of course, we are also focusing on additional development and enhancements of our products suitable for international markets as we go forward. Their demands are diverse just as it is in domestic markets. In some areas, there is quite a bit of overlap, either type of requirements that they have. At the same time, there are really, as I indicated, PECAN or Pico, we have also a handful of other products such as Abacus that that market likes and we are promoting that as well.

So similar to portfolio that we have managed domestically, it is our intention to respond to the demand of international markets in the way of expansion of our portfolio. That is very important to be able to sustain our growth in that market.

Okay, great and regarding the Tinga partnership, so will they be offering your full line of products and services or is there a particular focus specified in the agreement and also was there any fees that you have to pay to be on that platform?

So, your last question, no, there is no fee. We have a major agreement in various levels that generates, if you will, a revenue generation on what they sell. And then the first part of your question, it's not our entire portfolio at this point. It's in fact a very focused product initially focused on weather information that is suited for certain financial advisors that then we would expand it to traffic. And we have a specific language articulated in our agreement that talks about that.

So this was really the genesis of development of brand ClearPath. And ClearPath is a brand of -- a series of products that we are developing and its initial one is suited and developed for that kind of application in which we have Tinga. As I indicated, we have ClearPath also in a beta test in two public agencies as we speak that would focus on the traffic attributes of that particular product.

Okay, great. Thanks, guys.

William Myers, Miller Asset Management.

Hi, again. Congratulations on the quarter on good revenue gains. I'd like to follow up on a previous question. Are international margins similar to or above or below American margins?

It is somewhat similar, Mr. Myers. I should say though, in international markets, we are still, to a great extent, in an investment mode. So we will have not reached what I would call a steady-state condition in the international market, but the typical margins that we enjoy are pretty much aligned with our domestic margins. In the long run and in a steady-state condition, I would envision that those margins are not going to certainly have any adverse impacts and they are in the 40% range, if you will.

Okay, well, that sounds good. And do you break down your percentage of revenue that comes from international operations?

No. No, we don't at this time.

Okay, could you give us some sort of indicator of an order of magnitude? Is it (multiple speakers) 10%?

Sure, it's less than 10% at this moment on an annual basis. It is our intent certainly to expand upon it as we go forward.

Okay, so plenty of room to expand.

Absolutely.

Okay, well, thank you very much.

Thank you for your questions, Mr. Myers.

(Operator Instructions). [Minaj Negharni], CIG.

Good afternoon and congratulations on a very good quarter.

Thank you. Good afternoon to you and thank you, sir.

Can you please give some color on how seasonality affects your revenues in Roadway Sensors and in Transportation Systems?

Yes, sir. So typically, this quarter that we just finished, Q3, is our weakest quarter historically for the Roadway Sensors. You'll appreciate that construction, primarily in the northern states domestically, it slows down; so therefore we have less POs. Transportation Systems, we have two major holidays and the number of days are less than a typical quarter. So we have less billable days. So, historically, this quarter has been let's say about 23%, 24% or so on annual. So it is seasonal.

And then what happens going from March quarter to June quarter to September quarter? Is there any pattern there?

There is some. Again, generally, the way I look at our quarters is as follows. Typically, and I underline the word typically, our second fiscal quarter is our strongest. Then it is our first quarter, then it's the last quarter, then it is the third quarter. So let me repeat. It is sort of 2,1,4,3 is typically how it has been let's say over the last four or five years.

Okay. And during calendar 2014, what do you expect the mix of the two segments, Roadway Sensors and Transportation Systems? And how will that impact your overall gross margins?

Yes, so we are at the moment developing our fiscal plan. In other words, much of the calendar year 2014 would be in what we call fiscal year 2015 because it starts in April and ends in March. We are finalizing those plans and in fact we plan to present that to our Board of Directors in meetings in mid-February.

So at the moment, I really couldn't and perhaps shouldn't speculate as to that mix. But I could tell you that we expect growth in both of those segments, as I indicated, combination of our investments, initiatives and the marketplace and our strengths are aligned. We expect growth in both of those.

Okay. And regarding gross margins, you said your gross margins for Transportation Systems business was about 26% and your target is 35%. Is that right?

That's correct, that's correct. So that's -- in the long run, that's our target. That's where we're headed and I just repeat for the Roadway Sensors, 45% and 15%. And then, of course, in iPerform, once we get to a SaaS model, you could speculate the software-based type of products. We would expect in the long run to have a steady-state margin of 60% and 15% respectively for the growth in operating margin.

Okay. For Roadway Sensors, you are already at what, 40%?

We fluctuate essentially between 45% and 50%. So we have been enjoying at or better than target margins. As you expand and perhaps get into OEM mixes of products that we sell, we still like 45% and anything that we enjoy more than that we really like.

Okay. So my question would be what actions are you planning to take to improve your gross margins in the Transportation Systems business because that's where you are below the target?

That's an excellent question. So much of the reasons that it is at that level is the higher mix of subconsulting arrangements. So strategically, what we like to do is, as we grow, we like to do more of the work in-house to be able to enjoy a higher gross margin and we believe that we are on track to reach that target in the upcoming quarters and years.

Okay, very good. Just one final question. Did you buy back any shares in the December quarter?

We did not. As far as the shares we've purchased since inception, 2.3 million for about $3.6 million at an average price of $1.54. We are currently in the process of updating our 10b5-1 plan. So that's all I could share with you at this point.

Okay, very good. Well, thank you very much.

Thank you, sir, for the questions and have a wonderful afternoon.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Mohaddes for his closing remarks.

For the final quarter of fiscal 2014, we continue to expect organic revenue growth from our core businesses. We believe that both the public and commercial sectors are in need of our intelligent traffic management products, information and analytics solutions and we believe that our investments in these areas along with the strengthening marketplace will continue to build shareholder value. We appreciate everyone's support and thoughtful questions and we look forward to updating you again on our continued progress.

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