Iteris Inc (ITI) 2015 Q4 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 its fiscal fourth quarter ended March 31, 2015. Joining us today are Iteris' interim President and CEO Mr. Kevin Daly and the Company's CFO Mr. Andy Schmidt. Following the 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 or the future performance of the Company. Statements 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 you to the documents that the Company files from time to time with the SEC, specifically the Company's most recent Forms 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 until June 30, 2015 via the investors section of the Company's website at www.Iteris.com.

Now I would like to turn the call over to Iteris' interim President and CEO Mr. Kevin Daly. Sir, please proceed.

Thank you Travis 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 our fiscal year ended March 31, 2015.

Our core transportation business segments of Roadway Sensors and Transportation Systems grew at a combined annual rate of 6% driven by a noteworthy 15% annual growth in Roadway Sensors. Significantly, Transportation Systems also built its backlog to a record $29.6 million by the end of the fiscal year, a 7% increase from a year ago and a record level of backlog.

The major contributors in the year-to-year growth of Roadway Sensors were increases in the distribution of third-party products in the Vector hybrid video radar sensors and the Velocity travel time products. We also made major progress during the year in the transition to new versions of our core Vantage products such as the new VantageNext detection platform with both performance and produce ability advantages for us.

In the Performance Analytics segment, which we previously called iPerform, we achieved a number of significant milestones with our ClearAg product suite for the agricultural market. Most critically we're now actively engaged with a number of key players in the precision ag market. At the present time we have approximately 20 organizations evaluating one or more of our ClearAg products.

Also after a multiphase beta-test program we released the first production version of our ClearAg app at the end of the fiscal year. In the fourth quarter we supplemented the market development activities we've been conducting throughout the year which were focused on major enterprises in the aquaculture space with developments and sales teams targeted to opportunities for the ClearAg app in the retail sector of the aquaculture market. This team's primarily working with channel partners and with crop consultants.

Precision Analytics activity in the transportation market declined slightly on a year-to-year basis due primarily to slower than anticipated adoption of analytical metrics by the transportation agencies. We continued our intellectual property activities with an overall increase of five granted patents and nine applications over the fiscal year. This brings our overall IP portfolio to 31 items, most of which are related to our ClearAg developments.

Now I'd like to turn the call over to Andy to walk through our financial results. Andy?

Thank you, Kevin. First of all before I go through our fourth-quarter and fiscal year 2015 highlights I'd like to bring to everyone's attention that we'll be talking to both GAAP and non-GAAP results today. In particular we have provided a non-GAAP view of our fiscal year 2015 that adjusts for what management feels are atypical operating expenses to better present the performance of the Company in fiscal 2015 as well as to provide a benchmark of operating expenses for the start of fiscal 2016.

Specific to the fiscal 2015 year we experienced atypical audit and quarterly review fees and financial consulting support fees totaling $65,000 for Q4 and approximately $1.9 million for the fiscal year. We also recorded $866,000 of costs associated with the change in the Company's CEO and CFO in Q4 and approximately $1 million in total for the fiscal year. Today's earnings release and the related current report on Form 8-K describe how we calculate these non-GAAP financial measures and provide a detailed explanation of our atypical expenses as well as a reconciliation between our non-GAAP financial measures and their most directly comparable GAAP measures.

Moving forward our Q4 was very solid. Total revenues in the fourth quarter of fiscal 2015 increased 2% to $18.0 million compared to $17.6 million in the same quarter a year ago. This was primarily driven by the 11% increase in Roadway Sensors revenues.

Gross margin in the fourth quarter of fiscal 2015 was 40.0%, a significant increase from 34.9% the same quarter a year ago. The increase in gross margin was primarily due to an increase in Transportation Systems gross margins largely due to a higher labor content versus subcontractor content and the timing of revenue recognition on certain projects.

Non-GAAP operating expenses in the fourth quarter of 2015 increased to $7.4 million compared to $6.1 million in the year ago quarter. The increase was primarily due to planned investments in headcount, product development and sales and marketing expenses in our Performance Analytics segment.

Non-GAAP operating loss in the fourth quarter was $140,000 compared to operating income of $44,000 in the year-ago quarter. Non-GAAP net loss for the fourth quarter was $198,000, or $0.01 loss per share compared to net income of $50,000, or $0.00 per share in the same quarter a year ago. In regard to our total year fiscal 2015 we posted record revenues of $73.2 million and non-GAAP earnings of $0.02 driven by a strong performance by our Roadway Sensors segment.

Gross margin for the year up slightly to 39.0% due primarily to segment or product mix. Non-GAAP operating expenses for the fiscal year 2015 increased to $27.4 million compared to $24.0 million in the year-ago period. The increase was primarily due to planned investments in headcount, product development and sales and marketing expenses in our Performance Analytics section.

Non-GAAP operating income for the year was $781,000 compared to operating income of $2 million in fiscal 2014. Non-GAAP net income for the year was $675,000, or $0.02 per share compared to net income of $1.4 million, or $0.04 per share in the same quarter a year ago -- same period a year ago.

Cash and cash equivalents at March 31, 2015 was $22.0 million compared to $20.4 million at March 31, 2014. Operating cash flow was approximately $3.5 million, capital expenditures approximately $1 million and we continue to carry no debt.

Regarding our stock repurchase program we repurchased 473,000 shares in fiscal 2015 at a settlement amount of $863,000. At March 31, 2015 we had approximately 2.88 million shares available to repurchase as per our plan.

Total backlog at the end of fiscal 2015 increased to $39.1 million compared to $35.6 million in the year-ago period. Backlog at March 31, 2015 was comprised of $29.6 million from Transportation Systems, $6.2 million from Roadway Sensors and $3.3 million from Performance Analytics. In terms of housekeeping we expect to file our 10-K tomorrow and are very pleased to report that the Company has remediated its internal control material weakness that was identified during the fiscal year 2014 audit.

This concludes my prepared remarks. I'll turn it back to Kevin.

Thank you, Andy. As I indicated in my opening remarks our core Transportation businesses continue to show strength throughout the fiscal year. We expect this will continue into fiscal 2016 as we support these areas with both product and market development activities.

In the Sensors segment we believe a significant component of this strength will come from the growth of high information content sensing systems such as the hybrid video and radar systems, our Vantage Vector products, and the vehicle to infrastructure systems, our Vantage Velocity products. With these and other technologies currently under development we believe that Iteris can play a very significant role in the preparation of important segments of the transportation infrastructure to support the coming connected vehicle initiatives.

We see the Systems segment benefiting from the overall robustness of the transportation market. In particular the intelligent transportation systems or ITS segment of this market, a core Iteris strength, is expected to see double-digit annual growth over the next decade reaching a level of $35 billion by 2020.

We believe that two specific technology developments will provide Iteris competitive advantages in this segment going forward. The first of these is in the ITS area of connected vehicles, sometimes called the V2X technologies.

Iteris has developed and currently maintains the connected vehicle reference implementation architecture for the US Department of Transportation. This architecture was intended to provide a consistent structure for the evolution of critical technologies for connected vehicles. The connected vehicle area is expected to be the fastest-growing segment of the ITS market in the coming years.

The second area is an increasing obligation on the part of transportation agencies to provide analytical support for project performance and maintenance enhancements from traffic and weather software applications. We already support major agencies such as Caltrans and both the Virginia and Colorado Departments of Transportation with our Performance Analytics software iPeMS and we are working to extend the applicability of both ClearPath Weather and iPeMS to a wider range of state and local agencies.

Although the utilization of analytics in transportation was beginning to increase back in the 2013 time period as we better understood the market dynamics we determined in fiscal year 2014 that Iteris should investigate alternative markets that could utilize the core analytic skills that Iteris was developing. We determined from this process that with a reasonable supplemental investment in area-specific analytic capabilities the agriculture market provided Iteris an attractive opportunity with a significant potential for near-term success.

As a result we began an initiative in fiscal year 2014 to develop a presence for Iteris in the precision agriculture or precision ag market with an aggressive development activity to create a product suite that we now call ClearAg. Iteris was in a strong position to undertake this initiative because of its long-term investments in the development of precision meteorology as well as atmospheric and land surface modeling that were supporting its transportation analytics business.

While these capabilities did not represent a complete solution for the precision ag market they were an essential core resource that provided Iteris a strongly differentiated position. Iteris' core transportation business segments have been generating significant EBIT and cash flow over the past several years and we believe that these resources can largely offset the investments the Company needs to make in order to create the agriculture market opportunity.

In the fourth quarter of fiscal 2015 we accelerated our strategic investment in ClearAg by increasing the market development and sales activities associated with the initiative. We made this decision based upon both the progress we had made in the technical development of the ClearAg products and the status of the precision ag market itself. We anticipate additional investment in sales, marketing and product development through fiscal 2016 to continue our progress; however, we expect these investments to be increasingly offset by profit generated from highly leveraged, subscription-based revenue streams.

Precision ag represents a market of between $1.5 billion and $2 billion in the US with an annual growth rate of 13%. Outside the US the market's considerably smaller but is growing at nearly twice the US rate.

Some key elements of the precision ag market, for example, location and guidance services are relatively mature. ClearAg, however, addresses one of the three primary emerging trends in the market: advanced sensors and big data. The significance of this area is understandable considering the requirement for agriculture yields to increase by 50% over the next 15 years coupled with the maturation of traditional mechanical, chemical and genetic technologies that have provided most of the historic yield growth.

There are 14 public companies, for example Deere, Lindsay and Trimble, and over 80 private companies, examples are Awear, Granular, Conservis and FBN, that are typically identified as participating in this market. Further indications of the vitality of the precision ag space is that the level of investment, of venture investment in the field has increased substantially over the past few years resulting in the emergence of a diverse set of new organizations in the space.

Published reports indicate that the ag tech which is somewhat broader than precision ag market has attracted nearly $2.5 billion of investment in 2014 and will likely see similar investments in 2015. These investments of course are in addition to the hundreds of millions of dollars that major enterprises in the aquaculture space are investing on an individual basis.

To establish a sustainable presence in the precision ag market we believe that we needed not only to address the immediate issues but to prepare to accommodate the significant changes we anticipate in the type and volume of data that will become available in this area over the next five years. We therefore built ClearAg upon our scalable machine learning system for agriculture the EMPower platform. EMPower enables us to both deliver ClearAg field level solutions in a cost-effective manner on a global basis and to incorporate external measurements and observations in a matter that improves the performance of these solutions. Thus even considering all of this activity in the space we believe that ClearAg's big data foundations, global reach and scope of performance as well as its solid IP base place it in a very strong competitive position in the precision ag market.

Our ClearAg products use of sophisticated data management, analysis and modeling techniques with our weather, soil and weather content to drive proprietary land surface and economic modeling in order to provide specific recommendations through our ClearAg advisory services. These services are associated with key agricultural production events throughout the crop growth lifecycle from planting to irrigation and nutrition to harvest and are provided specific in each location and each individual crop.

The data used to produce these activities draws from 35 years of historic climatological data, from ClearAg NowCasts and from patented ClearAg modeling and prediction technologies. Agricultural producers can leverage ClearAg advisories to supplement their own analysis of current conditions, enabling them to make more accurate and effective decisions on the timing and phasing of major events in their production cycle.

We have two classes of ClearAg products targeted at two different segments of the market. For the retail channel and for crop consultants we provide ClearAg Apps which provide location-specific field level information and science-based advisories built upon our precision weather, global soil and crop growth modeling processes. For large enterprises in the crop protection, crop nutrition and equipment manufacturing segments of the market we provide programmatic API access to the analysis and modeling processes that ClearAg offers. We also provide big data and software analytics for precision agriculture applications on a global basis.

ClearAg's APIs enable companies to integrate powerful analytics and visualization algorithms into their own systems to enhance the efficacy of their analytical processes and to improve product performance in the field. We began to provide customer and partner access to both ClearAg Apps and to our ClearAg APIs for evaluation in the fourth quarter of fiscal year 2015.

The Internet of Things is bringing a new dimension into the precision ag space and is in fact the focus of many of the newer entrant's into the field. We believe that over time the Internet of Things will significantly supplement the data sources currently available to make precision ag decisions. For this reason as I mentioned earlier we designed and built our ClearAg upon our EMPower platform to allow customers to effectively utilize the Internet of Things data sources including weather and soil monitoring stations, irrigation systems and imaging platforms such as UABs to supplement the weather, soil, water and growth modeling that ClearAg uses in order to improve the efficacy of ClearAg's modeling and advisory services.

ClearAg thus provides a common platform for the collection and analysis of vast amounts of content from the Internet of Things data as well as the weather, soil, water and crop growth information. Unlike most of the participants in the precision ag market Iteris' ClearAg technology is a completely global solution. While most of the channel partners that we work with are focused entirely on the US market the enterprises and consultancies with whom we are engaged address the global agribusiness market. We believe that our ability to provide support services on a global basis provides ClearAg a strong competitive advantage in this market segment.

Looking forward, we believe that each of our segments is working in an expanding opportunity space and in particular the agriculture market represents a significant new opportunity for Iteris. Our goal in fiscal 2016 is to capture and to capitalize on the opportunities available to us in the transportation market and to establish both brand recognition and early adopter usage of ClearAg on as wide a basis as possible in the agriculture market. We expect to deliver this through a combination of our ClearAg APIs and our ClearAg Apps.

The initiatives we're undertaking to achieve these objectives will demand a focus of our existing resources and an expansion of our current talent base but we do not anticipate any extraordinary technical or operational barriers to achieving these objectives. We believe that our ClearAg initiative will enable Iteris to establish a presence with individual producers and their allied suppliers and consultancies through our ClearAg App and with global agribusiness enterprises and consultancies through our ClearAg APIs.

Our ability to operate through our partners on a global basis will to some degree soften the significant seasonality of the US agriculture market but even so we anticipate it will require full production cycles to completely develop the ClearAg value proposition. The metric we are focused on in the near-term to assess our progress in this area is acres under management. Our objective is to establish ClearAg at a level of at least 1 million acres under management in the next fiscal year.

We believe this represents a meaningful presence which will permit us to establish the ClearAg value proposition. With that basis in cooperation with our partners we plan to scale our ClearAg initiatives to achieve a significant share of the 400 million acres of US cropland and to establish a foothold in the 88% of the cropland that lies outside of the US.

We truly appreciate the support we've received from the investment community as we prepared Iteris for this business transition. The years of technical development and the more recent focus on market development have provided Iteris we believe a solid foundation for success in these new initiatives. We're encouraged by the early feedback we've received from our interactions with the market.

We'd be disappointed if these initiatives did not result in a meaningful presence for ClearAg in the agriculture market over the next several quarters. While this result of course is not entirely under our control we're satisfied the investments that the Company has made over the past several years put it in a very strong position as the market develops.

Now we'd be glad to respond to any of your questions or comments. Thank you. Operator?

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

Good afternoon. Kevin, I understand that you have a number of folks in the evaluation stage, you pretty much spell that out, but can you give us your latest thoughts on where you feel you are in that it evaluation process of getting to the major milestone partnership for ClearAg that you're looking for? In other words what inning do you think that we're in and what needs to happen from here for you to lock in a major partner?

And then also maybe I don't know if you can quantify time period, do you think it's a matter of months, do you think it's a few quarters before you have that first major win? And then also you talked about the sales pipeline and I'm assuming you meant for the retail portion of ClearAg and maybe you could just give us a sense of what you think that could amount to in revenues over the next year.

Okay. Let me try to address a number of those issues. Of course our position in the evaluation varies quite a bit among the various players.

I think the best way to characterize it right now, among the ones that we find most interesting which you can certainly read to be the big ones in this process, we're transitioning I think past the technical evaluation process and beginning to get into the business discussions, the value propositions of the potential relationships. So I think the first phase of this was determining whether or not technically the product was useful in their environment and I think in several important cases we've been through that phase of it.

So we're now in the process of beginning to get serious with them about what relationships might look like. It's very hard to predict how long that process takes. We're not very patient people but my guess is that it's probably two to three months before we could tie meaningful, and I'm talking about significant relationships down but we'll see.

We have more than one that are moving down that process so I think that there are a couple of potential avenues for success here and we obviously will announce those as rapidly as possible. The sales pipeline you're exactly right is focused on the resale partners and the crop consultants primarily around the app. I'm really impressed with the level of activity that's going on there.

There's I think when I last counted like 80 opportunities that are in process in that phase of the business. It's really beginning to feel like that sales process is beginning to move. Those are much smaller individual deals; typically those would be $10,000 to $100,000 for individual producers depending on the scale of the operation that run.

I think those can break relatively early in this process. We've only been at this for a couple of months. So I think there's probably another two, three months in front of us but I think those will begin happening.

On the other hand because of the structure of this as basically software as a service or advisories as a service the revenue will build relatively slowly in that. And so I think while it's very important strategically that we maintain or establish a presence in the market with these ClearAg Apps I think if we can realistically look at what's going to go on in the next nine months to a year it's much more likely that the bigger piece of our overall revenue opportunity is going to be through the APIs with major partners than the total revenue that we can acquire through the apps.

Okay, that's extremely helpful. And then as a follow-up, the Systems segment was a little below what we were looking for and I'm just wondering maybe you can speak to that and what you're seeing in terms of the latest developments in Systems? And I guess what the outlook is there, maybe you can touch on funding and the mix of prime versus subcontracting work?

Sure. You're right it was a little in terms of the delivered revenue from systems it was a little bit less than we had anticipated.

On the other hand the bookings have been very strong. It seems to me, and I'm not the world's greatest expert in the area, but it seems to me that the market is opening up a bit. The angst about the ongoing temporary extensions of the transport bill are beginning to soften a bit.

So I think we're seeing projects open up. I also believe that this whole connected vehicle initiative is going to put some very significant energy into that space. It hasn't shown up as contract value yet but it certainly is getting more parties actively involved and more organizations feel a need to stick their oar in the sand and not get left behind.

So we're feeling that this year that we're currently in we have a very solid set of backlog. We're executing against that backlog. I think the normal secular growth rate of the segment is going to be good and I think there's some possibility that we might find some interesting new growth areas associated with these connected vehicles.

Okay, good. And then finally, maybe you can just give us an update if there is any on how the CEO search is progressing.

It's going well I think. These searches have sort of a life of their own.

We have been at it about four months at this point. I think we're converging as a search committee and as an advisor, our search advisor team, and I think we might beginning to see candidates that are really solid candidates for this position. We're not anxious in the sense that we think the Company is headed in the right direction so we don't feel that we've got to jump at the first opportunity.

On the other hand for all kinds of reasons I think it's important to get a permanent position, a person in the position as quickly as possible. So I'd say it's going well.

I kind of book marked it at about a six-month process at the beginning. I think it's still probably going to be close to that. We'll see.

One thing I am very encouraged by, I think Andy has provided a really significant level of strategic direction to the Company and will provide continuity however this process goes or however long it takes. But think at this point it's going reasonably well.

Okay. Thanks for taking my questions and good luck.

Thank you very much.

(Operator Instructions) William Meyers, Miller Asset Management.

Hey, congratulations on the systems sales revenue. I'd like to ask, you mentioned a goal of achieving 1 million acres under management in about a year's time and I was just wondering if you couldn't share with us what does it mean to have an acre under management in revenue terms?

Is it $0.01 an acre, $0.10 an acre, $1 an acre? Just some sort of generality would be fine. I'm certainly not going to hold you to the specifics but what are we talking about here?

Sure. That's actually a great question. First of all, an interesting statistic, on average in the US one of these producers puts in about $300 an acre of total cost to produce their product.

Our feeling is that the metric here in terms of value proposition is measured in dollars per acre. Probably not $10 per acre but not pennies per acre. And when we're dealing with individual apps I think that dollar give or take per acre is a reasonable number to think about.

It's a little hard to say exactly how that value proposition plays out with some of the large agribusinesses because they cover very, very large areas very quickly. And so our relationship with them is going to be based on a more complex set of metrics. We are absolutely adamant about ensuring that we preserve our value in those relationships but it's going to be a little harder to tell exactly how that plays out.

The 1 million acres is also by the way important to us because we believe we need that kind of a base to completely evaluate the value proposition and to position the product long term more effectively in the market. So it's got both things. But the simple answer is I think it's dollars, not pennies but it's not hundreds of dollars either.

Okay that makes sense. And then just one detail you had mentioned the need to continue to invest in the Performance Analytics segment and it wasn't clear to me are you expecting this coming year to invest at a higher rate than you did last year or are you just talking about continuing the kind of rate of investment we saw last year?

I think we are going to invest at a somewhat higher rate because we have augmented the sales and marketing effort and I include all that in the overall development aspect of things.

On the other hand we do expect that to be offset to a degree with some actual revenue coming in. So the net investment probably won't look much different but the actual level of effort particularly in the sales and marketing area will be higher than last year.

Okay, thanks very much.

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

Well thank you all very much. I appreciate your time and your interest in the Company. We feel this is a really significant time in the Company and there are a lot of important changes going on.

So we hope as we go through these calls on a quarterly basis that you'll be able to see measurable progress in all these areas as the Company moves forward. We'll be talking to you in three months.

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