Iteris Inc (ITI) 2014 Q4 法說會逐字稿

Good day, everyone, and thank you for participating in today's call to discuss Iteris' financial results for its fiscal fourth quarter and full year, ended March 31st, 2014.

Joining us today are Iteris' president and CEO, Mr. Abbas Mohaddes, and the Company's interim CFO, Mr. Craig Christensen. Following their remarks, we'll 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 of 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 an 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 to the documents that the Company files from time to time with the SEC, specifically, the Company's most recent Forms 10K, 10Q and 8K, 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, Catherine, 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 fourth quarter and full year, ended March 31, 2014.

Thank you for your patience, as we worked closely with our auditors to complete the audit. We apologize for the delay. There were several elements that contributed to this delay, but I won't get into any details, as we have already laid the out in prior press releases in recent months.

With that, let us move on and talk about our last fiscal quarter, as well as the year.

In our fiscal fourth quarter, we experienced positive results, most notably in our Roadway Sensors business segment. Success in various growth initiatives and continued traction in several key products contributed to this growth. Our growth reflects that growing demand for our core products and services.

Transportation systems was down slightly in the quarter, reflecting soft market conditions in the trailing fiscal year. While we have been disappointed with this segment in fiscal 2014, we believe there are significant opportunities to improve this business and we are working to position it for growth.

As a result of many years of development activities in the transportation marketplace, Iteris possesses unique capabilities in precision weather-mapping and forecasting. We are leveraging this expertise to capitalize on opportunities in large markets, both within and adjacent to our traditional transportation markets.

The profits and cash flow generated by our core segments are funding that accelerated investment in iPerform and new generation of intelligent traffic- and weather-related information solutions, which we believe represents a great growth opportunity, demonstrated by the recent contract wins, new key partnerships and major technical developments. IPerform has continued to make significant progress that I will highlight later in the call.

As we have announced previously, our CFO resigned on July 11th. We appointed Craig Christensen as the interim CFO and he and his team performed superbly, working closely with the auditors and the audit committee to complete the audit process.

I would like to turn the call over to Craig, who will take us through the details of our financial results for the fiscal fourth quarter. Craig?

Thank you, Abbas. Good afternoon, everyone.

As many of you know, in the beginning of fiscal 2014, we realigned our organization with our business strategy, by moving certain transportation systems resources into the iPerform segment. Therefore, we have provided pro forma comparisons of our revenue and segment income in our press release.

During the fourth quarter, ended March 31st, 2014, revenue increased 11%, to $17.6 million, compared to $15.9 million in the same quarter a year ago. This was primarily attributable to a 25% increase in Roadway Sensors' revenue, which was due to increased demand for several of our key products. IPerform revenues were up 14%, while Transportation System's revenues were down 1%.

Gross margin in the fourth quarter was 35.9%, compared to 36.3% in the same quarter a year ago. The 140-basis-point decrease was primarily attributable to the timing of costs that remained in the quarter on certain Transportation System's contracts, while the related revenue recognition was delayed to future periods.

Operating expenses in the fourth quarter increased to $6.1 million, compared to $5.5 million in the same quarter a year ago. The increase was primarily due to planned increases in sales and marketing expenses, and Roadway Sensors in iPerform, including planned increases in the headcount and accelerated research and development expenses in iPerform.

Net income in the fourth quarter was $50,000, or zero pennies per share, compared to $56,000, or zero pennies per share in the same quarter a year ago. The decrease in operating income was primarily due to significant investment in iPerform business segment.

Total revenues in 2014 increased 11% to $68.2 million, compared to $61.7 million in 2013. The increase was primarily driven by a 22% increase in Roadway Sensors' revenues. The iPerform revenues and Transportation Systems revenues were also up 5% and 2%, respectively.

Gross margin in 2014 increased 40 basis points, to 38.1%, compared to 37.7% in 2013. The increase in gross margin was primarily due to higher Roadway Sensors revenues, which carry a higher gross margin than Transportation Systems and iPerform.

Operating income in 2014 increased to 24%, to $2 million, compared to $1.6 million in 2013, primarily driven by the revenue growth in Roadway Sensors. Net income in 2014 was $1.4 million, or $0.04 per share, which included approximately a $100,000 gain related to the sale of the Company's vehicle sensors business.

Net income in 2013 was $2.4 million, or $0.07 per share, which included a $1.5 million gain, related to the sale of the vehicle sensors business. Cash and cash equivalents at March 31st, 2014, was $20.4 million, compared to $18.7 million one year ago. We continue to carry no debt.

Total backlog at the end of the fourth quarter was $35.6 million, compared to $36.8 million in the prior quarter and $38.6 million in the year-ago quarter. Backlog was comprised of $27.6 million from Transportation System, $4.1 million from iPerform and $3.9 million from Roadway Sensors.

This concludes my prepared comments on the financials. Now, I'd like to turn the call back over to Abbas. Abbas?

Thank you, Craig.

As I indicated in my opening remarks, we experienced strong results in both the quarter and full year, particularly in Roadway Sensors. Roadway Sensors continues to be strong, primarily due to traction in our [chief] products and various growth initiatives we developed earlier in the year.

Transportation System's revenue was down slightly for the quarter, reflecting soft market conditions in the trailing fiscal year. We believe there are significant opportunities for improvement and we are working to position it for growth.

Most importantly, these core segments continue to generate the necessary cash flow to drive our ongoing investment in iPerform. We are pleased about the recent developments that have taken place in our iPerform segments, both in development and partnership milestones, and expect to achieve and accelerate the milestones we have laid out in fiscal 2015.

Before I speak more about our outlook, I would like to discuss our operating segments in more detail. As Craig indicated, Roadway Sensor sales were up 25%, to $8.1 million.

Several of our key products continue to gain market traction, including Vector, which is our first-to-market hybrid video and radar detection, our Velocity, the market-leading travel time data collection product, as well as SmartCycle, which is sensitive to providing adequate time for bicyclists at signalized intersections. Finally, our OEM distribution revenue in Texas is growing, enhancing our overall growth strategy.

We believe our overall investment strategy and product development and sales and marketing is working well. In addition, we believe the overall market demand for traffic management products and services continues to improve.

We also promoted Todd Kreter to senior vice president and general manager of the Roadway Sensors division. Since joining Iteris in 2007, as vice president of engineering, Todd has continuously expanded his role and has led several successful development initiatives. He has also been instrumental in influencing our company's culture by implementing robust processes in a collaborative environment and we look forward to leveraging his exceptional engineering and operations experience.

Our Transportation Systems sales were down 1% during the quarter. There are several key initiatives we are pursuing and we are focused on capturing new major contracts to expand our backlog. As we have announced recently, we have been awarded several systems contracts and our backlog has expanded in recent months.

Our performance management segments, or iPerform, has made significant progress over the last fiscal year and even more in recent months. As you may have seen in our latest series of announcements, we have won two contracts and were selected to compete on another series of potential projects.

We have also made major technical developments to our platform of products for both the public and commercial sectors. As a reminder, the iPerform business model is transitioning from primarily a consulting business to further expand into software-as-a-service in the commercial markets.

Our current suite of products can be broken down into three categories; iPeMS is an ITS industry leading performance measurement and traffic analytics application for both public and commercial markets. ClearPath Weather is a hyper-local weather solution for state and local transportation agencies that provides winter road maintenance strategies to optimize the deployments of personnel, material and equipment.

And ClearPath Ag, a big data and analytics platform for precision agriculture is our latest solution in the iPerform suite of products. The ClearPath Ag solution provides high-resolution feed level precision weather content for the precision Ag market and is designed to aid in better crop management, chemical application and risk mitigation for growers and crop insurance providers. The ClearPath Ag API platform is a commercial sector offering, targeting agribusinesses in the retail, chemical, fertilizer, seed and crop insurance sectors.

Now, moving on to some specific project ones; in April, we were awarded $1.2 million contract from Virginia DOT to utilize our iPeMS software. As you may have seen, in June, we launched our ClearPath Ag API platform and announced the first partnership agreement for this precision agriculture technology with Agrian, a leading provider of agri-data tracking information systems.

We also recently announced a key iPeMS contract opportunity with the I-95 Corridor Coalition, which spans the entire eastern seaboard, from Maine to Florida. The I-95 Coalition has selected Iteris, in partnership with HERE, formerly Nokia, to compete with a small group of other companies to provide traffic data and analytics, support on a state-by-state basis.

Iteris will provide data management and analytics software and services to help state agencies process these data into actionable performance management information.

In May, we introduced our next-generation ClearPath weather solution, with new, expanded, cloud-based support for large state agencies and corporate facility managers, as well as support for smaller customers, including contractors and municipalities.

This update solution provides winter maintenance strategies for optimizing personnel, equipment and chemical purchases and provides actionable pavement information for effective maintenance response.

We continue to enhance this industry-leading solution, releasing several improvements and updates, including storm playback capabilities, a storm motion display and a traffic data layer; integration that will allow agencies and maintenance managers to better understand the effect of traffic on weather operations.

We expect to release several updated versions of ClearPath Ag in the upcoming quarters and enhance its capabilities. In this quarter, we expect to release ClearPath Ag version 2, which will include support for [map tiles] and special weather content.

In the next quarter, we expect to launch ClearPath Ag 3, to support soil, historic and forecast temperature and moisture models and the first of our field-level advisory services, including planting and crop-growth modeling.

Finally, in the last fiscal quarter, we expect to release ClearPath Ag 4, with additional premium API and mobile application services being made available to our partners' network. In addition to ClearPath Ag's technical developments throughout fiscal 2015, we also expect to announce several new partnerships and customer milestones.

In the upcoming months, we expect to have several additional launch partners for the second and third releases of our ClearPath Ag offering. These partners and customers access our precision weather content through partner applications, on a monthly or annual subscription basis.

With the expanding market for traffic and weather analytics, we expect our continued investment in iPerform's development will position Iteris as a go-to-market leader in providing intelligent information solutions.

At this time, I would like to briefly address the delay of our 10K filing and its impact on our 10Q filing. Again, we very much appreciate your patience while working closely with our auditors to complete the 2014 audit.

As previously announced, it will have a cascading effect on the timing our Q1 review and 10Q filing. We are committed to working with our auditors closely and filing the 10Q as soon as possible and appreciate your understanding as we complete this process.

Now, before I provide my closing remarks, we would love to -- we would be delighted, rather, to respond for questions and comments. Catherine?

(Operator instructions).

Jeff Van Sinderen, B. Riley.

(Inaudible).

Thank you.

Hi, Abbas, maybe you can just talk a little bit more about what's going on in the sensor business and when you think we might see that business turn positive, year over year; if you think that's a Q1, Q2 event or what the timing you think is for that business to be positive again.

Thanks for your question, Mr. Van Sinderen. I presume you mean Transportation Systems.

Yes, yes; I'm sorry. [Systems in that].

So, yes; I think what we have seen in the marketplace is expanded health of the request for proposals. The last four or five months, we have expanded the backlog beyond the bend rate and I am quite optimistic about the opportunities in that business segment.

We have several initiatives; growth initiatives that we are looking at. We have expanded our sales and marketing opportunities. We are pursuing a handful of new geographic locations in the marketplace. So, all of that makes me optimistic about the growth of that group.

And then I know you haven't reported the June quarter yet, but is there any sense you can give us of, overall, how the business trends are running; maybe also how they've progressed in July and August, if there's any change in the trajectory from what you were seeing in Q4? And then maybe you could just touch on where backlog is currently running.

Sure. So, we would be announcing, obviously, the Q1 as soon as the review is complete, but we put out a release that articulated the range of revenue and operating income that we expect. We are actually experiencing a very good Q1, in terms of the Roadway Sensors. In terms of new development and initiatives and milestones, we are on track with our segments.

And then Transportation System is the area that we are focusing for improvement, as I indicated. That's where we need to grow more and we need to focus on certain areas that we could expand our market share. We have a handful of specific initiatives in transit, in the ATIS and other areas that we are looking at, and we have hired a few more business developers and actually some engineers to help us on these various contracts at we have been executing.

The trend is very positive, overall, in the way of backlog expansion, so I'm optimistic about all of that. And I believe that, when we look at Transportation Systems, in the upcoming quarters, we've got to be able to get back into, perhaps, high-single, maybe even double-digit growth. As I really see the market, overall, the traffic management market is improving.

That's really helpful. One more and then I'll let someone else jump in.

Maybe you can just give us a little more color on -- I don't know how much you can speak to at this point, but on the results of the audit, any restatements that were needed or if nothing was needed and then, also, any changes in your accounting practices going forward, as a result of the audit.

Yes, so again, I apologize for the delay, but there were various contributing factors, as we have announced, in the expansion of the types of work that we do. We used to do, primarily, the types of contracts that were straightforward consulting. As we are moving into software arena and operation and maintenance; these are multi-element contracts that really require a lot more detailed activities and procedures to go.

And I'm actually, overall, now that the audit is over, to take some of the good practices that we have identified, to put in use. And remediations that we have come about; we are, in fact, as we speak, in the recruiting process of bringing a director of revenue recognition to help us with that.

And so, the 10K, we plan to, shortly, release and file and so, we would articulate a little bit more expansion on that. But overall, when you look at the ranges that we put on our news press release on July 16, we were well within that range and we are happy that we completed this process.

I'm really proud of our accounting staff that collaborated very closely with our auditors and the engagement committee. Overall, it was very helpful to come to a point of concluding it. So I hope that helps, Jeff.

That does help. Thanks very much and good luck.

Thank you.

(Operator instructions).

Alex Silverman, Special Situations Fund.

Thank you for hosting the call.

You're welcome, Mr. Silverman.

Back in January of '13, you indicated that for the next 18 months, you'd be reinvesting in the iPerform unit. I was wondering if you could grade yourself on where you think that process is and how you've done. And if you could help us with when you believe iPerform will turn profitable.

Thank you for the question; yes. So, back in January 18, as you indicated we initiated our expanded investment in iPerform and, at the time, our focus was traffic management and we made some traction and sometime, about a year ago this time, we identified adjacent markets and we developed new platforms and offering in the agri-business, so that, overall, iPerform, Alex, sort of evolved that whole business.

As we moved into it more, we identified additional adjacent markets and we decided to, yet, accelerate that investment, as we saw market validation, the partnerships, as we talked to a lot of customers. So far, as an example, we have talked to a little over 100 organizations that expressed interest in the services and products that we have in this market.

So, about six months ago, we formalized our products and services in three different categories, as I indicated in my earlier remarks; iPeMS to focus on the traffic management, ClearPath Weather to focus on weather, primarily with public agencies, and then ClearPath Ag to focus on agri-business. And the latter that I mentioned is really experiencing significant traction, so therefore, we are spending quite a bit of R&D into this.

Now, as far as the revenue, we would expect that the legacy revenue that we have enjoyed from the iPeMS public that ranges about, maybe $6, $7 million a year, to continue to grow. And then the revenue from agri-business software; we believe that, although we are experiencing some small amount of revenue, but it'll take a few quarters before that really accelerates.

I would put it this way; I would be disappointed if we did not reach to double-digit revenue within a year to 18 months. Our plan is to really accelerate our development to have the kind of products that our customers could use and then be able to generate revenue for us and I hope this helps.

So, double-digit revenue from the iPerform segment; the three units, or subunits, from what is, roughly $6 million a year now. Is that correct?

Yes. And -- please.

And what is the breakeven level for this division then?

I don't have the actual number with me right now. Craig, you may want to take a look at some of the numbers that we have. But I would say, at the current rate, Alex, we are probably at about, maybe $4 to $6 million.

One thing that we have done, though, just since beginning of the fiscal year, just April 1; we have added, I want to say 17 or 18 people in that group, primarily software engineers. So we are growing that group and so our expenditure is expanding, so we have somewhere around 65, 70 people in that group.

And much of the activities that we are doing is really going into research and development, primarily developing these four precision Ag products that we have already mapped out, since beginning of the year.

So I'm just going to go back to my original question, which is at what point do you expect this division to turn profitable?

Yes, we have not, Alex, really announced or shared our detailed financial plans at this moment. But, if it is helpful, I would envision that we are probably one to two years away from overall profitability in this segment, based on our current investment plan.

So, 18 months ago, when you indicated that you'd be sacrificing the profitability of the rest of the business to invest in iPerform, what was that 18 months? What was supposed to happen 18 months from January of 2013?

Yes. So we were expecting the traffic market to expand quite a bit and then getting into the commercial traffic market. So what happened was that a lot of the data that we were wanting to use; it became commoditized and so we had, about a year ago, perhaps modification of our business plan to really get into other adjacent markets?

So, based on that, as I indicated, the agri-business came about; application of weather really became a lot more profound and so we have been following that roadmap, as of a year ago.

It would be helpful, in the next call, I assume, when you report the June quarter, if you could help investors with a roadmap for iPerform and for that roadmap to indicate when that division should turn profitable.

I will. Thank you for the comments, Mr. Silverman.

Thank you.

You're welcome.

(Operator instructions).

[Minaj Ned Carney], Chip Investor Group.

Good afternoon.

Good afternoon, sir.

Can we please talk about gross margins and operating margins? What are your expectations for the second half of calendar 2014; that is current quarter and December quarter?

Let me respond to that and then let Craig to expand on that, if he wishes

From an overall gross margin standpoint, we don't anticipate any significant deviation from where we are today, for the rest of the year, primarily because the iPerform software offerings are not kicking in yet.

When that kicks in; when we get into the serious state, operating with iPerform, because the software offerings have a much higher margin, we believe that that would have a positive profound impact on our overall margin, but we are several quarters away from that.

Typically, what we envision the margins for different business are, for the Roadway Sensors, our goal is to reach 45% and 15%. This is growth and operating margins, respectively. For Transportation Systems, our goal is to get to 30% and 10%. And then for iPerform, the blended margin for them, meaning the legacy and the software, is about 60% and 15%, respectively.

But, as far as the remainder of this year, as I indicated, we don't envision a significant deviation. We obviously continue to work on expanding and growing those margins and we are optimistic about the opportunities of that, primarily because of the tractions that we are seeing in the marketplace for some of our products that we are enjoying a good margin.

Other than that, that's as far as the margins. Craig, would you wish to expand?

No, I think you covered it very well.

So, implicit in that question was the product mix; is it fair to assume then that your mix, say Roadway Sensors, as well as Transportation System, then iPerform will remain about the same for the rest of this calendar year?

Of the -- yes, go ahead.

We don't envision a material change in our margins. If you look at the, let's say last four to eight quarters, relatively steady; a point or two deviations, in some cases, improvements.

So, overall, we strive to improve the margins and, as I indicated, once the iPerform software revenues kick in, I would expect a significant change in our margins, upward of course, to take place. And we are just working our way toward that opportunity.

Also, I have a question on cash flow. What was the cash flow from operations for the fourth quarter and for the fiscal year 2014?

So, for the fourth quarter, we haven't calculated the fourth quarter, but for the year, we generated $3.3 million cash from operations for the year.

Okay.

And so total cash improvement as $1.7 million on the year, year over year.

And, Abbas, can you give us more color on growth opportunities in the Roadway Sensor business? Do you see more opportunities in the United States or in the international markets and anything else you see on the horizon?

Absolutely, I'll be delighted. So that business segment, when you look at our leadership in the marketplace and the fact that we have over 120,000 in installed bases of sensors, we are leveraging that in this whole movement of the big data, its application and application of analytics to turn them into actionable information.

We believe that not only we have the opportunity for growth domestically, with the existing products and additional innovations that we are doing, but also international. We are focusing primarily in Middle East and Latin America.

But we are also quite excited about adjacent markets. When you look at the transformation of our industry in the intelligent transportation systems, with the connected vehicles, with the autonomous vehicles, and all of this mobility transformation that is taking place; I truly believe that we are at a tipping point and the roadway sensors, the sensors that we have, we expect to have a profound impact in the marketplace.

So I'm quite optimistic about the growth opportunities of that group. I've been quite pleased with their growth on the fourth quarter, year over year, and since then that we would expect to announce in the upcoming quarters.

Thank you very much.

You're welcome. Thanks for the questions.

Benjamin Mackovak, Cavalier Capital Markets.

Hi, Abbas. [Caviar] Capital would have been a good name, too.

Did the company buy any shares back in the past two months?

Yes, we have. We have had 10b-5 in place; that we put it in place many months ago, so have let that 10B5 to take its course. I don't believe that we have had a significant buyback, because of just the magnitude of the funds that we had on quarterly basis, but we would announce the details of how many we have purchased.

Craig, if you have any statistics, feel free to share.

Sure. In fiscal year '15, we've bought back approximately 300,000 shares for about $550,000 in fiscal year '15, thus far.

But we do have, as you may be aware, a buyback plan that is fully supported by our Board of Directors. And we kicked it off a couple of years ago and so we have been pursuing that plan since.

And I want to say the average purchase price, roughly, has been in the $1.60, $1.70 over the last couple of years, so I believe it has been an appropriate move for us.

So the company is over-capitalized, in our opinion, with all the cash you have on the balance sheet. Has there been any discussion about a special dividend or a tender offer?

From time to time, we have those discussions at the Board. At the moment, our current strategy is really focused on development, research and development, product development, sales and marketing; those activities that we feel that are quite attractive for us.

That is not to say that, from time to time, we look at the opportunities to perhaps acquire other firms. And as I indicated, the Board looks at all of the opportunities, including dividends, but no decision has been made along those lines at this time.

And then, last question. The June quarter results; should we expect the 10K will be filed before you have a call like this for (inaudible)?

Oh, absolutely. So we have received the notification from NYSE and we are working with them. And my expectation is that, because the first quarter is not an audit, it's review; that it should take a typical three to four weeks or around that timeframe that end of September, maybe early October, to be able to file that.

And then that was, of course, the cascading impact of 2014 and I would expect that, after that, we should get back into normal filing situation.

Thank you.

You're welcome, sir.

(Operator instructions).

Thank you. And throughout fiscal 2015, we continue to expect organic growth and innovative products and services, resulting in revenue growth from our core businesses and plan to utilize the profits for the continued investment in iPerform. We believe the ongoing enhancements of iPerform will be extremely valuable in adjacent markets and will help us expand our presence in both public and commercial sectors.

As the market leader for intelligent management products, information analytics solution continues to expand, we are confident that our investment in these areas will continue to build shareholder value.

We believe that transformation of our mobility with connected vehicles deployments on the horizon, the role of image processing and sensors, the analytics to turn the big data into actionable information and application in the adjacent markets, Iteris is positioned to profoundly influence the market with innovative products and services and the necessary partnerships to accelerate building shareholders' value.

We truly appreciate everyone's support and types of questions and we look forward to updating you again on our continued progress. Operator?

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all, again, for your participation.