Iteris Inc (ITI) 2015 Q2 法說會逐字稿

Good afternoon everyone, and thank you for participating in today's conference call to discuss Iteris's financial results for its fiscal second quarter, ended September 30th, 2014.

Joining us today are Iteris's president and CEO, Mr. Abbas Mohaddes and the company's interim CFO, Mr. Craig Christiansen. Following their remarks, we'll open up 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 statements 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 there is 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 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 until November 26, 2014 via the investors section of the company's website at www.iteris.com.

Now, I would like to turn the call over to Iteris's president and CEO, Mr. Abbas Mohaddes.

Please go ahead, sir.

Thank you Brendan, and good afternoon, everyone.

As you saw at the close of the market today, we issued a press release announcing the financial results of our fiscal second quarter ended September 30th, 2014.

Our second quarter marked the fifth consecutive quarter of double-digit year over year revenue growth in our roadway sensors business. Following in a step with the first quarter, the record second quarter revenue in roadway sensors were primarily due to increased sales or OEM-distributed products.

The OEM distribution strategy compliments our integrated product and service offerings, contributing to both our top and bottom line. Transportation systems return to growth in the quarter due to the start of new projects and particularly the $10.1 million in new contracts signed during our first fiscal quarter.

We continue to realize success with our development milestones and various growth initiatives for iPerform. While iPerform revenues declined due to selling fewer legacy projects, we launched ClearPath Ag 2.0 in September as planned, and have already received positive market feedback.

Finally, I'm also pleased to announce that last week on November 6, the company's board of directors approved a $3 million increase to the company's stock repurchase program.

But before I comment further, I would like to turn the call over to Craig, our interim CFO, who will take us through the details of our financial results for the second quarter of fiscal 2015.

Thank you, Abbas. Good afternoon, everyone.

Total revenues in the second quarter of fiscal 2015 increased 9% to $18.6 million, compared to $17 million in the same quarter a year ago. This was primarily driven by a 16% increase in roadway sensors as well as a 6% increase in transportation systems revenues. While iPerform, which represented only 6% of total revenues, declined $282,000, or 21%.

The increase in roadway sensors revenues was largely attributable to the success of various growth initiatives, including increases in the distribution of certain OEM products for the intersection market, such as traffic controllers, traffic cabinets, and related equipment.

The increase in transportation systems revenues was primarily attributed to the start of certain new projects in the backlog, while the decrease in iPerform revenues was driven by a decline in legacy iPerform offerings.

Gross margin in the second quarter of fiscal 2015 decreased 138 basis points to 39.3%compared to 40.6% in the same quarter a year ago.

The decrease in gross margin was primarily due to the sales mix of products within the roadway sensor segment, as increased sales of OEM products generally yield lower gross margins than roadways sensors core products.

Although OEM products yield lower gross margins, we expect the OEM business to continue contributing positive income to the roadway sensor segment.

Operating expenses in the second quarter increased to $7.6 million compared to $5.9 million in the same year ago quarter. The increase was largely due to approximately $600,000 in audit fees and approximately $500,000 in outside consulting fees, in connection with contract revenue testing and the completion of our fiscal year 2014 audit.

As a result of this activity, we have improved our internal controls and processes, and believe that future annual audit costs will decline substantially, despite the additional recurring costs expected in future periods for the improvements to the internal controls and processes.

To a lesser extent, operating expenses in the second quarter increased as a result of planned increases in head count and sales and marketing expenses in iPerform, as well as accelerated research and development expenses in iPerform.

Operating loss in the second quarter was $320,000, compared to operating income of $1 million in the year ago quarter. Net loss in the second quarter was $187,000, or negative one penny per share, compared to net income of $661,000, or two pennies per share, in the same quarter a year ago.

The decrease was primarily due to the continued investment in iPerform and an increase in audit fees for our fiscal year 2014 audit. Cash and cash equivalents at September 30, 2014 increased to $22.4 million compared to $20.4 million at March 31st, 2014, and we continue to carry no debt.

During the second quarter of fiscal 2015, Iteris repurchased approximately $145,000 shares of its common stock for $243,000. Since implementing a series of stock repurchase programs beginning in August 2011, the company has repurchased approximately 2.6 million shares for an aggregate purchase price of approximately $4.2 million.

As of September 30, 2014, approximately $153,000 remained available for share repurchases under the program. On November 6, 2014, our board of directors approved a $3 million increase for our existing buy back program for the company to continue repurchasing its common stock.

Total backlog at the end of the second quarter of fiscal 2015 increased to $40.9 million compared to $38.8 million in the prior quarter and $40 million in the year ago quarter.

The increase in backlog was primarily due to transportation systems adding $9.7 million in new contracts during the quarter. The backlog in September 30, 2014 was comprised of $32.2 million transportation system, $5.4 million from roadway sensors, and $3.3 million from iPerform.

This concludes my prepared remarks 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 reported a strong results in our fiscal second quarter, particularly in our roadway sensor business, which has experienced double-digit growth for several quarters.

We were also pleased to see our transportation systems business return to growth in the quarter.

While our iPerform business was down slightly this quarter, this was due entirely to legacy product sales, and we continue to make progress in product development partnerships and customer sign ups.

But before I speak more about our outlook, I would like to discuss our operating segments in more detail.

Several of our key products in the roadway sensors segment continue to gain market traction, such as the SmartCycle, which combines video vehicle detection and bicycle detection in one. Velocity, our travel time data collection product. And our newest product, VantageNext, which we believe is one of the industry's most advanced video detection scalable architecture platforms, with enhanced remote functions.

Finally, our OEM distribution revenue in Texas has been growing, which we believe enhances our overall growth strategy in this business. The OEM distribution includes controllers and other apparatus pertinent to traffic management and control, all of which are complimentary to our integrated product and service offerings.

We believe our investment strategy in product development and sales and marketing is working well. And so we believe the overall market demand for traffic management products and services should continue to improve.

Our transportation systems sales were up 6% during the quarter. These are -- there are several key initiatives we are pursuing, and we are focused on captioning new major contracts to continue expanding our backlog.

In fact, we have recently been awarded several systems contracts, and we continue to expand existing relationships with key clients, such as the Virginia Department of Transportation, California Department of Transportation, Bay Area Metropolitan Transportation Commission, and Orange County Transportation Authority.

One such contract was a 1.4 million signal system management project for the city of Omaha. We are serving as a system manager for the deployment of the Intelligent Transportation System, which builds upon Omaha's traffic signal system master plan that we developed in 2012, and we'll include the management of the $35 million ITS upgrade program to reduce congestion.

We are also looking to expand our presence in certain markets in the U.S. where transportation business is experiencing more traction, such as Texas, Florida, and certain estates in the Midwest.

Now, on to our performance management segment, or iPerform. Our current suite of products can be brought down into three primary categories. First, iPeMS is a performance measurement and traffic analytics application for both public and commercial markets.

Second, ClearPath Weather is a hyper-local road weather maintenance solution for state and local transportation agencies, and provides winter road maintenance strategies, which are expected to optimize the deployment of personnel, material, and equipment.

And finally, ClearPath Ag, our big data and analytics platform for ag tech, which is the latest solution in the iPerform suite of products.

The ClearPath Ag product line provides high-resolution, field-level precision weather, soil, and climate information for the agriculture market.

The ClearPath Ag product line is designed to aid in better crop management, chemical application, and risk mitigation to improve bottom line performance for growers and agribusinesses.

ClearPath Ag targets agribusinesses in the genetics and crop protection, fertilizer and crop nutrition, crop risk, and retail sectors.

In September, we released the ClearPath Ag Select product line, which is a set of software services that provides customers with access to the information essential to making informed cropping decisions.

ClearPath Ag Select provides high resolution map visualization, a field of specific weather data up to a one-by-one kilometer with location specific weather information, derived from a targeted array of ag weather observation and forecasting platforms.

In December, we expect to release our next version of ClearPath product, a state of the art software service that provides soil moisture models and climate information, as well as the first of our field-level advisory services, including planting and crop growth modeling.

In our fourth quarter, we plan to further augment our ClearPath product line with the launch of a set of premium API and mobile component services.

In addition to ClearAg's technical development, we have signed several new partnerships, and are in various stages of discussion with many other prospective customers. This includes five of the eight leading crop protection manufacturers and three of the top five ag retailers in U.S. that are also users of our first generation precision weather data product, weather plot.

We are in the process of transitioning these long-term customers toward a ClearPath Ag platform.

To provide you with a rough idea on the economics of this business, we believe some of these services will provide for enterprise class subscriptions revenue in the range of $100,000 per month per customer. We believe these products empowered the ag advisors and growers with information needed to make better daily decisions at key points during the growing season.

Now before I provide my closing remarks, we would like to respond to any questions or comments that you might have. Operator?

Thank you sir.

(Operator Instructions)

We'll go first to Jeff Van Sinderen with B. Riley.

Good afternoon, and let me say congratulations on all of your business segments running positive.

Thank you, Jeff.

I think the Midwest might be able to use your ClearPath product lately, with the weather they've been having there.

Are you seeing anything in terms of, I guess, you know, when the weather is extreme, does that start to drive more interest in that, you know, for in terms of traffic management?

It certainly does, Jeff. Several things happened, one of which is you know, we have this 5-1-1 for many estates, the volume of the calls significantly go higher.

We have the weather monitoring center in our Grand Forks, North Dakota, which runs 24/7. Those guys are very busy during this time, because they take the national weather and with all the local sensors, they try to provide the real time information for many of the states, places that the roadway sections may freeze. You know, this information helps them to know that in advance and go and apply chemicals and salt and prevent that freezing.

So yes, it really, the magnitude of our work expands when we experience weather like we are experiencing in Midwest at the moment.

Okay.

And then is there anything new that you can talk about in terms of iPerform and that whole segment of your business? You know, anything new since I know you guys, it hasn't been that long since we spoke with you, but any new developments to talk about there?

Sure, just the last, since the last 30 days, when we had our last call, we have had three new companies that have begun evaluation on ClearPath Ag, which for competitive purposes, I won't name them.

We also have developed advanced discussions with eight new organizations since we talked last time.

As I indicated last time, we already have two signed contracts, and we are in the final stage of a contract with a rather large organization. So, that has been, from a partnership standpoint.

And of course, in the development side, we have made the continued progress towards the next launch that we are planning to do in December, the product that includes soil moisture and content and forecast.

Okay, great.

And then is there anything that we can read into in your systems business? It was great to see that business turning positive. Is it just kind of the normal seasonality of the way things fall, or is there something else to read into there that's driving that business up, the backlog up, and so forth?

Yes, the underlying business health is actually improving, we believe, Jeff.

So, when you look at the backlog, year to date, in other words Q1 plus Q2, we signed about $20 million of new contracts. So, that really stems from improved health of the market.

Third quarter, the one that we are in right now, seasonally and traditionally is less because number of days that we have due to couple of holidays, and in our core business, roadway sensors, because of the construction limitations, we experienced seasonally less business.

But having said that, we feel quite optimistic about the health of our market in traffic management. Both roadway sensors and transportation systems are experiencing a healthy backlog, so we feel pretty good about them from the outfocus standpoint.

Okay, good.

And then in sensors, it's great to see that the OEM business is really getting going. What about the non-OEM part of that business. How's that looking?

It actually has been relatively flat this last quarter, when we talk about it year over year. But we're getting traction on a few of the key products, such as the SmartCycle, Velocity, the new product that we had launched a couple of quarters ago, VantageNext.

So domestically, we believe that that is poised for growth for several initiatives that we are doing. These new products that will be getting traction.

The other initiative that we are focused on is the international. In particular, in South America and Middle East, where we have done quite a bit of exploratory activities, forged relationship with the several distributors.

And we have seen some green chutes in the way of selling products. We envision that that part to begin providing us traction.

So all in all, as far as the traditional core roadway sensors, I feel optimistic going forward as well.

Okay, good to hear.

And then my last question. Is there anything we should consider in terms of gross margin expectations for the December quarter in terms of the mix it business? Obviously, there's some moving items there in terms of mix. Anything to consider that would impact gross margin?

I don't envision anything unusual to the best of our knowledge at this point.

You know, we have this seasonal revenue reduction on a sequential basis, as I indicated. But I really don't see anything that materially would impact the margins owe feel it should be a steady. We always have that mix, you know, depending upon, for example, in systems how much sub consultant do we have in terms of roadway, how much OEM do we have, but I don't envision any material impact on the underlying and margins as we have had in the last few quarters.

Okay, great to hear. Thanks very much and good luck.

And thank you very much for the questions.

We'll go next to Ben Mackovak with Cavalier Capital.

Hi Abbas.

Good afternoon, sir.

Can you help me with the audit expenses?

You said there was about $600,000 for the audit, and about $500,000 for consulting fees. And going forward, it will be higher than historically, but obviously that whole $1.1 million won't be recurring, is that correct?

That sounds correct. Go ahead.

Okay, so what will be recurring? Can you just help us figure out the delta there?

So, we envision that as far as the annual audit, that number is substantially reducing. Now, one of the activities that we did as part of remediation was to hire a director of revenue recognition about a month or so ago.

And so we believe that that would be an added GNA cost plus perhaps a slight added audit and maybe legal fees going forward on a quarterly basis.

So, if I had to just give you a rough idea, I would say that that's got to be less than half a million dollars on an annual basis going forward.

Okay, great.

And then, on the iPerform, it's hard to see much progress there, if I look at revenue or backlog or really anything. But it's costing the company a lot of money.

Is there an opportunity to maybe slow the amount of spending on that?

So, we are focused really on two major elements in iPerform. One would be really a significant development. You know, our current development roadmap calls for four major products in the ClearPath Ag launch. So, we have already done two. We released one in June, one in September. Our next one is in December. The next one after that is in March.

So, we want to make sure that we accelerate the production of these products and launch them. Because of the growing season, we want to make sure that we capture the ag advisors and growers in a timely fashion so by design, we are really in the midst of accelerated development of these products.

At the same time, we have expanded, you know, sales and marketing activities and hiring people. So, since first of our fiscal year, so that would be April 1 to now, we have added the 28 individuals to that group.

So, these are investment really necessary for us to then actually being enjoying revenue.

Now, I should mention that our business model for that group is a SaaS model, so these are subscriptions, really high margin subscriptions that we have to sign up these organizations that we work with that they then provide revenue in the coming quarters. So, I Would point to in a way of progress is really development.

We just came from Grand Forks, which is, if you will, the epicenter of that development in the ag market. Significant progress. Several demonstration that we saw. So, a lot going on in that. And just the fact that several major organizations are willing to really go to trial with us, I think really stems from the success of our strategy initially and also discussion with many of other organizations to sign up.

So, I realize that it is not turning revenue as we speak, but these are the necessary investments that we have to do to really get there.

Okay, thank you.

I hope this helps. Appreciate it.

(Operator Instructions)

We'll go next to Jason Revland with Blueprint Capital Management.

Hi, thanks for taking the call. Good afternoon.

Good afternoon, Jason.

First of all, just nice to see the buy back as well as to have the audit issues largely behind you guys.

My question relates to the ClearPath Ag. You know, it certainly has a lot of promise, and I appreciate you quantifying the business model opportunity. And the question is, how advanced are some of these conversations? And then when can we expect a material contribution, possibly in 2015 from that division?

2015 in the [bay of] calendar or our fiscal year?

Calendar.

Calendar, yes. So, you know, we are in various stages of discussion in probably over 50 prospective customers, some of which are in later stages. And typically, with many of these customers, they want to go to trial or beta test of the product, typically for about 30 days or so, and then after that, they become customers, more likely.

So, end of September really was the version two release we had, and we refer to it as the ClearPath Select. And we were able to sign up several organizations that are in trial now.

So that activity will continue. A key product, really, is this December one, because it substantially changes the dynamics of the value proposition in that we're getting to soil's condition. It could tell the growers [quart] and soil temperature and moisture conditions; forecasting soil temperature and moisture conditions, historical information as well, and that is a very valuable opportunity. So, what we are focusing on now is in the coming weeks.

We are launching the product mid-December, and we are getting ready to go to trial with them.

As far as the revenue in 2015, we expect that there be some revenue, particularly as we go toward the second half of the fiscal year. But at this point, I don't necessarily envision that it would be so significant that one might go, "gee, are you getting to [bray cuban] position or not?"

Ad so we are not really focused on that. Our main focus right now is this quarter and next quarter, to really finish up the products, sign up a lot of customers, and we are preparing by the way, our next fiscal year activities, which we would complete in January and present it to our board in February.

Okay.

Just a follow-up, if I may.

Please.

The improvement of the software or the offering, how material is that improvement as far as getting customers to bite? I mean, are they willing to pay for the product even without that, or is it just an add-on capability, or are they really all kind of waiting for that?

No.

Nobody is per se waiting. You know, they have already signed up for the second product that we launched and offered to the market back in September. My point there is that the augmentation of the offering, the soil's condition, in addition to the weather condition that we have been providing, is really substantial, that because we're getting close to the planting season at that time, the soil's condition is very important.

At the same time, we have some planting advisory activities that we are offering. We are recommending plants windows by crop type, for example, and field accessibility, near term field conditions.

These are the types of planting advisory that the growers and ag advisors are really thirsty for. So, and we have done quite a bit of market validation in the last two quarters.

So these are all by design. And so we are quite optimistic about the uptick of these offerings that we are getting ready to launch in December.

Great. I appreciate the detail, and best of luck, thank you.

I hope it helped, Jason. Thank you.

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

We believe the precision ag marketplace presents a significant growth opportunity in the near term. Particularly, as we develop an market a predictive feed level weather and soil information and mobile solutions.

We plan to continue to executing our growth strategies for the core businesses, and utilizing their operating income to fund a strategic investment in iPerform, leading to differentiated solutions for our customers and positive returns to our shareholders.

We believe that Iteris is poised and positioned for significant growth through execution of growth initiatives in core businesses, as well as execution of the iPerform businesses strategy.

We appreciate everyone's support and thoughtful questions. I look forward to updating you again on our continued progress. Operator?

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