James Miele - Chief Financial Officer Abbas Mohaddes - Chief Executive Officer

Joe Giamichael - Rodman and Renshaw Jeff Van Sinderen - B. Riley Frank Magdlen - The Robins Group Lee Fischer - Lloyd Miller [Brett Reece] - Janney Montgomery Scott

Good day ladies and gentlemen and welcome to the Second Quarter 2009 Iteris Incorporated Earnings Conference Call. My name is Stacy and I’ll be your conference moderator for today. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call Mr. Jim Miele, CFO. Please proceed. James Miele - Chief Financial Officer: Thank you, operator. We welcome to the Iteris second quarter 2009 conference call. I’m Jim Miele, the Chief Financial Officer of Iteris and I’m joined today by Abbas Mohaddes, the company’s CEO. First, I would like to recap the financial results of our fiscal 2009 second quarter and then Abbas will provide further commentary about our business. At the conclusion of Abbas’s comments we will open the call for questions. Before proceeding I 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. The forward-looking statements we discuss during the call are based upon the information we currently have available. This information will likely change over the time by discussing our current perceptions of the market and the future performance of the company and its products, we are not undertaking an obligation to provide updates in the future. Actual results may differ substantially from what we discuss with you today. And no one should assume that at a later date our comments from today will still be valid. We refer you to the documents that the company files from time to time with the SEC. Specifically the company’s most recent Form 10-K and 10-Q. These documents 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. For the second quarter ended September 30, 2008, our net sales and contract revenues increased approximately by 12% to $19.1 million compared to $17 million in the same quarter of the prior year. The increase in net sales and contract revenues was mainly a result of a 29.2% increase in transportation systems contract revenues to $8 million compared to $6.2 million in the prior year quarter. Also in the current year quarter vehicle sensors net sales increased by 8.9% to $3.5 million while Roadway Sensors net sales were flat at $7.6 million. Abbas will provide more details regarding net sales and contract revenues later in his comments. Gross margins for the second quarter declined slightly to 41.3% from 42.8% in the year ago quarter. The decrease in gross margins was primarily a result of products mix which was driven by one, an increasing contract revenues as a percentage of our total revenues noting that contract revenue gross margins than our product gross. And two, the overall product and sales mix in Roadway and vehicle sensors in terms of both customers and geography. Currently I expect this mix remain relatively the same for the remainder of the fiscal year. The company reported operating income of $2.1 million for the current quarter compared to operating income of $2.3 million in the prior year quarter. The company continues to invest in sales and marketing and R&D activities and expenditures in both areas increased compared to the prior year period. Both cost areas however, were down sequentially from our last fiscal quarter. As a result current quarter operating expenses increased by 17% to $5.8 million compared to $5 million reported in the year ago quarter but were down sequentially from $6.4 million recorded in our first fiscal quarter. Net income for the second quarter was $1.1 million or $0.03 per share compared to net income of $2.2 million or $0.06 per share in the year ago quarter. In the prior year quarter our net income was positively affected by tax benefits generated through the release of valuation allowance against certain of our deferred tax assets. This resulted in a $214,000 net tax benefit booked in Q2 of last year. There was no such benefit in the current quarter and we expect to experience an effective in the low 40% range going forward. With that said, there are approximately 68 million of unrealized deferred tax assets in addition to the 9.3 million that are currently reported on the company’s September 30, 2008 balance sheet. We analyze our tax positions quarterly and should this analysis result in a change in future estimated taxable income, the valuation recorded against the remaining unrealized deferred tax assets will be evaluated and if released in part or in whole are expected to reduce the company’s effective tax rate for something less than 40%. The company’s balance sheet and financial condition greatly improved last week when the company entered into a new $19.5 million credit facility with California Bank and Trust. This facility will entirely replace the company’s $10 million line of credit with Silicon Valley Bank which expired on October 15. The new facility provided the company with a two year $12 million revolving line of credit to be used for working capital and growth needs and a $7.5 term note to be used to retire all outstanding convertible debentures due in May 2009. After September 30, 2008, the company had no borrowings on its line of credit and entered the new facility on October 16, with no amounts borrowed and in excess of $4 million in cash. The company has significantly improved its access to working capital that has the ability to repay its debenture obligations in full without a material destruction to our overall financial condition. Now I would like to turn the call over to Abbas Mohaddes, who will discuss the quarter and our strategy in greater detail. Abbas? Abbas Mohaddes – Chief Executive Officer: Thanks Jim. I am very pleased with the results of our second quarter. Iteris continue to execute on its strategic and operational plans to deliver record sales of 19.1 million while achieving 2.1 million in operating income. We continue to offer new products and services to the market and I am delighted Iteris has achieved the record backlog of 35.7 million in our transportation system segment, representing year-over-year increase of 37%, showing a solid backlog in this economic environment and an excellent leading indicator of future growth. : We have also made progress in partnering with other companies. In August, we forge a partnership with Delphi to distribute key active safety products into our channels and to integrate Delphi radar based technology into our product portfolio for heavy truck customers. We also have signed an agreement with [Inc Com] a wireless data solution company to distribute their traffic control wireless products in California and Florida complementing our offerings. As we stated previously, our goal is to leverage our existing channels to market, to meet the demand of news solutions that have been requested by our current and prospective customers. I will expand on these points later in my comments. Thanks for the progress we have we are making in the traffic management market and the profit generated over the recent quarters, we have been able to significantly reduce our debt. We currently have no borrowing against our line of credit and having excess of $4 million of cash on hand. In addition, as indicated earlier, we have just expanded our credit facility. This financial strength will allow us to continue executing our strategic plan of accelerated growth. Now here is more detailed commentary on our performance. Revenues derived from transportation systems services grew over 29% year over year. We captured several major contracts during the quarter while managing expenses to levels slightly less than our first fiscal quarter. We signed over $17 million of new contracts help invest to further position Iteris as the leader in our market place. Our record backlog of $35.7 million is a 37% increase year over year. This level of increase in backlog provides us with a stability and better visibility regarding our future performance which is very important to our business planning and our shareholders in light of the overall US economic conditions. I am happy to report, due to our expanded market reach and added sales and marketing, we have signed over $25 million of new contracts just within the first two quarters of this fiscal year. During the quarter, we continued hiring new staff that did help us meet to execute the demand. We have added five new associates to the engineering workforce to focus on contract execution and revenue delivery. Roadway sensors enjoyed another good quarter, reaching 7.6 million. Although this sales level is flat year over year, we saw solid recovering in Texas, which historically has been a very important market for us. Orders in California and international markets have been lighter than expected, but all other regions remained strong on balance. We are beginning to see a strong demand in our new products we have introduced; namely VersiCam, which was developed to focus on key underserved markets such has minor intersections and the international market. We also expect a strong demand for the EdgeConnect product we introduced during the second quarter. EdgeConnect, which enables system operators and traffic engineers to view video detection on real time over Ethernet. The EdgeConnect Advance MPEG-4 and H.264 video compression ability minimizes bandwidth usage and is scalable to fit bandwidth availability. We estimate the global sales for the two products just discussed can build to an incremental $15 million in revenue to Iteris during the next few years. I am very pleased to say that we have a strong pipeline of products and we will be introducing more new products to market in the upcoming quarters and specifically we expect to introduce two new products before the end of this fiscal year. We continue to be optimistic about our leadership position as well as the opportunity we have to further expand the size of our addressable market. : The current truck market in North America remain soft due to the impact of the overall trucking industry sales. Our latest product Safety Direct, which we introduced to market last quarter is being very well received and the initial test results with two major fleets are encouraging. Safety Direct provides the operators and fleet managers with real time lane departure information, alerting them of possible safety issues proactively. I am also happy to say that we are also working on additional new products and strategic partnership to continue accelerating our growth for this business segment specifically we forged partnership with Delphi to exclusive distribute the radar based forward collision warning system for the North American commercial vehicles. We will also sell Delphi site alert blinded spot warning system in North America. We would utilize our successful commercial truck OEM and aftermarket sales channels and application engineering expertise to integrate Delphi’s radar based technology into our portfolio of active safety for heavy truck customers. We are excited about the prospect of sales expansion as a result of this partnership. I now would like comment more broadly on operations and our business outlook. First, we see a strong production of request for proposals from public agencies and we continue to submit bids for transportation systems projects to maintain and expand our backlog, and in our view this is critical to ensuring that we build our leadership position for the long run. Second, we have been accelerating our introduction of new products to market and believe this is a key strategy for accelerated growth and diversification. We have already introduced several new products to market this year such as VersiCam and EdgeConnect and as I said earlier we would be introducing additional products to market before the end of our fiscal year and expect an excellent reception in the marketplace. Third, as I have mentioned in the past, our objective is for Iteris to achieve growth while maintaining and improving upon our profitability. That profit focus is a key elements of our strategic plan. Despite the fact that we increased our R&D in preparation of accelerated introduction of new products to market and increase our sales and marketing investment during the first two quarters, in this quarter we achieved an operating margin of 11% as a percent of sales. At the same time, we plan to accelerate the revenue growth which is also a key metric in our strategic plan. Fourth, we continue focusing on improving our balance sheet, our working capital and achieving a good return on assets and investments. We are particularly pleased with the operating cash flow improvements in recent quarters and currently being out of our line of credit with an excess of $4 million cash on hand. The recent expansion of our line of credit and the overall credit facility allows us to retire the remaining $7.8 million in debentures due in May 2009. We have adequate access to cash to continue executing our strategic plan. Finally, we plan to maintain our commitment to our strategic plan and to expand into new markets through OEMs, channel partnerships as well as presence in key markets and geographies. We are in discussions with several potential partners and expect these relationships would help us solidify our leadership position in our market. Going forward notwithstanding any major budget shortfalls at the federal, state and local levels, I expect to see a continued growth opportunity for the traffic management market both domestically and internationally and Iteris will be a direct beneficiary of it. It is comforting that key states such as California continue to focus on infrastructure improvements and use of technology and transportation. For example, the major are on the Los Angeles county November ballot is proposed to raise $0.05 sale tax. If passed, it is estimated to generate $40 billion for congestion relief projects over the next 30 years. Another example is the state of Texas recently announced budgeting $300 million for transportation consulting services. In summary, again I am pleased with the results of the quarter particularly with regards to the strong backlog and underlying momentum as well as an accelerated introduction of new products to market. I believe we have many opportunities for increased growth and profit. We will continue to work hard to keep improving the company’s financial performance and build shareholders’ value. This concludes my remarks. We will be delighted to respond to questions and comments.

[Operator Instructions]. Your first question comes from the line of Joe Giamichael with Rodman and Renshaw. Please proceed

Good afternoon gentlemen and congratulation on the quarter.

Good afternoon. Thank you, Mr. Joe Gimichael.

Could you just briefly describe the type of customer you are seeing that’s booking the business on the traffic consulting side right now. We have heard a lot about the tax revenue shortfalls and budget cuts, but you seem to signing a fair amount of new business when headlines have been the most bleak?

Yes, the most recent large projects that we have been signing has been with as an example the Los Angeles County Metropolitan Transportation Authority. We have been signing contracts with the local agencies, many of the local agencies seem to continue producing request for proposals, some of those may be mid size, sometimes the smaller projects I’m talking about let’s say $100,000, $200,000 levels which is sort of our bread and butter in the consulting site. We also have seen some tasks from state agencies on continuation of work with Federal contract. So, really all around it’s a mix of various public agency at different levels that they have been come in long.

Okay. It hasn’t been sort this little municipalities whether our pocket to strength, you’re seeing things on State and Federal levels as well, right?

Well, absolutely. Although we have seen, some pockets of slow down in some agencies at the same time we have seen some that have had some funds and now getting ready to execute a contract.

Okay, great. Your backlog increased $7 million sequentially to $35 million, I assume most of this is accounted for in the $17 million of new transportation systems consulting contracts. Can you walk through what the intended conversion time is for that backlog?

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Got it. And just, last question. You have queued different related businesses here, one that’s more product drive and one it’s obviously more consulting oriented. I know, you spoken to desire to complete acquisitions in the past and on this call you express the desire to expand the product portfolio and you have been doing it at some degree. How you foresee this playing out in terms of, you know, how you continue to commit your assets. Is this going to remain sort of both the product and consulting driven entity or how do you foresee this playing out?

Yes, our focus is in traffic management and it’s a good mix of technology consulting as well as products. And, we continually focus on as part of our accelerated growth in our strategic plan to find IPs in their product areas that could help us achieve that accelerated growth at the same time if we identify consulting firms let’s say in geographic areas that they may not have a presence otherwise. Strategically it would make sense for us to begin partnering and perhaps ultimately acquiring them. So, we although at this time don’t have any arrangement or definitive agreement with anybody, we are in discussion with more than half a dozen different firms and companies in both products and services seeking opportunities for partnership and ultimately acquisition.

Okay, great. Well, thank you very much congratulations on the quarter.

Thank you again.

Your next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed.

Good afternoon. Relevant to the auto view business can you give us little bit more in terms of specifics and what you see happening in the truck market and in the passenger car market?

Sure, thanks for the question. The truck market, we have been soft the last two three quarters in North America. It has been actually pretty steady and growth actually in the second quarter in Europe and Asia. It is unclear however, going forward when the softness of the North American trucking industry would go away and we gain some strength. We see some movement in some niche areas such as let’s say the food market, we see some strength in those areas. We have some EPA regulations that by 2010 new engines have to go in so we expect perhaps the next quarter or two some surge of purchase in new trucks that should help us. So overall, the truck market I would envision going forward should only add the strength would be hard to envision and getting much softer than what it is or what it has been. On the car market as we know, we go through value of distributor, European distributor that is one of the top ten first tier automotive suppliers, they are working very hard, they are proposing on various records for proposals coming in from OEMs trying to expand really the platforms that they have on other OEMs. It is however, hard to estimate when some of those could come to play. We have seen competitors coming in, we have seen some of the OEMs beginning to develop their own lane departure warning. So, it sort of a double edge sword in one hand, we love to have a lot of that business. On the other hand it’s a validation for the market place. The one good news also is that we see the European communities advocating to active safety and we believe that for some time soon they May actually adopt this lane departure warning as well as perhaps two three other active safety for many of the large OEMs.

This one what do you think opens up the market, I mean, do you feel like you’re getting your fare share versus what the competition is getting in terms of winning contracts and I guess obviously part of that too is some of the business is just staying captive at some of the auto OEMs?

That’s a fair question. In the truck market we really have by far the largest share of the market. In the passenger car we have seen other competitors coming in but at the moment we speak there are more passenger cars on the road with Iteris lane departure warning than all other competitors combined by far. So, what happens is that those gradually would make deals for future years platforms that really haven’t sold the whole lot.

Okay. And then, if you can talk about the Vantage business a little bit or your Roadway Sensors business. I think you mentioned in your prepared comments that orders in California and international orders were running a little bit late, just wondering what the outlook is for those?

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Okay, good. And then, with your focus on our balance sheet and so forth just wondering how we should think about your R&D spending going forward if we should expect any shift in that?

Well, for the remaining two quarters of this fiscal year, we are going steady because we already have several committed projects that we are doing both invasive sensors and the roadway sensors. And as we speak, we are in the process of our annual plan. Our annual plan already started. We would be preparing it, completing it by the end of this quarter. We presented to the Board end of January and as you know our fiscal year is April 1st, by then we go into it. I would envision we haven’t really done the detailed numbers yet, but we have a long list of projects that we believe is very important in primarily responding to the demands of our customers and prospective customers. So I would envision that R&D at Iteris would stay strong. This is a key element of our strategic plan and we believe that it helps us accelerate the growth. Having said that, it is also important and also part of our strategic plan that we stay profitable to expected levels. I would like to personally see a double digit operating profit that go and forward in every quarter that we are in and eventually get to a steady state that we could achieve, let’s say, 15 to 20% operating income. But at the moment, we are in the accelerated growth mode and we try very hard to get close to those numbers.

So we should probably expect your revenues to continue to grow throughout the second half of the year, is that a fair assessment?

Well, that is certainly our intent. When we provided the guidance at the beginning of the year, the year revenue for the FY ’09 was expected to be 11 to 14%. At the moment, we are in that range and I would expect us to continue to stay in that range for the remainder of the fiscal year.

Okay, that’s great to hear. Thanks very much. I will let somebody else jump in.

Thank you, sir.

[Operator Instructions]. Your next question comes from the line of Frank Magdlen with The Robins Group. Please proceed.

Good afternoon and I will also add my congratulations on a good quarter.

Thank you, Mr. Magdlen.

When you look at the traffic consulting business, does that backlog really go out now about four years, is that a fair statement with the bulk of it being earned in the say next 12 to 18 months.

Well, the way I would estimate, there are some specific projects, Mr. Magdlen that goes longer than let’s say two years. But the by and large, when you look at the $35 million that’s a little bit over a year, let’s say 18 months worth of overall backlog for that business segment. So most of the projects I would say better than 70% of the projects have a life of less than a year, sometimes closer to six months. Does that help?

Yes, it does. Abbas, you talked about the VersiCam and EdgeConnect and you talked about, I would say, $50 million opportunity over the next few years. Can you help define few years what you expectations are there? Is that a five year process or seven year or a three year?

Yes. Let me first by correcting the number, it was 15, I apologize.

I am sorry.

If that didn’t come through properly, but the idea is that as we bring these products online, we sit down and estimate that what is the market size, how much of a share are we going to get, how much this specific product is going to add incrementally to the Iteris revenues. When we look at those two products together, I would envision that over the next three years or so the incremental added sales for those two products combined should reach up to $15 million. So let’s say on average about 4 to $5 million a year or so. I felt that would be good to provide some numbers in here that really explains everyone of these products that we are adding to our portfolio is very carefully looked at and evaluated and it really needs to respond to the demand in the market.

All right, thank you. And just back to the consulting business, one last question and that is, do you keep track of your success rate? You might bid on a 100 projects and you get – I don’t know what the hit rate or what the win rate is?

That’s an excellent question. We have been keeping track of that for the last eight years and we internally publish that on monthly basis and I present that at every Board meeting. We are quite fortunate, Mr. Magdlen, that our average since inception, this is like over 2,000 bits. We have about 65% success rate. Meaning that on average, every three proposals that we submit we are fortunate to receive two of them as awards. Now you may wonder, well what is the industry average on this. Again, my personal observation is that again tracking over the years is that in our industry the average success rate is somewhere between one out of four to one out of three. So let’s say 25 to 35-40%. So we are quite fortunate and this wasn’t by – didn’t happen by accident. It’s a very disciplined process the way, we go about our business development we leverage partnership. We are very careful on the types of projects that we propose. We are niche oriented. So the idea of criteria that goes in it that has been very helpful for us to achieve that kind of a success rate.

Thank you.

Your next question comes from the line of Lee Fischer with Lloyd Miller. Please proceed.

Yes, I think you are doing excellent job and with the stock at such an attractive valuation I have got to believe that the company is considering measures to increase shareholder value and I was wondering if you could share with us what those are? Thank you.

Mr. Fischer, thank you for the question and thank you for your comments. What obviously we have no control over the share price and we look at what it is. If there is any cancellation we see the market overall has been really hammered quite hard. We basically focus on execution. We have a strategic plan that we put together about a year ago that has several elements in it to accelerate our growth. That includes the idea of activities such as focusing on the highly demanded products and bring those to market ahead of time. What happens there when we bring a product to market in an accelerated fashion we are able to enjoy a good margin. We would be able to sustain the leadership for a while. The same thing happens in consulting side of the house by the way. We get into a lot of niche areas that we could execute attractive contracts. Another major key is to identifying IP and I think Mr. Van Sinderen had that question early on that I commented briefly. It is important for us to be vigilant and identify IPs, particularly at times like this that we might be able to acquire that could help us to accelerate growth. This might be a software activity. It may be a specific product that could be augmenting our growth or it could be a consulting firm in a city that we may not have a presence and then that would enable us to go in and market that state or metropolitan and be able to growth quite a bit. So these are some examples of activities that we really have focus on to grow and just continue keeping our nose to the grind and execute. That is how we feel would be ideal for us to do and hoping that the shareholders and prospective shareholders would take note and would help us to advance the value of shareholders.

Great work sir.

Thank you very much again for your comments and interest.

(Operator Instructions). Your next question comes from line of [Brett Reece] with Janney Montgomery Scott. Please proceed.

Hi gentlemen, and I echo the other callers congratulating you on a good quarter and I like that financing in place. I’d like to if I can just circle back to the backlog if a customer cancels or breaches the contract what consideration does a customer profit if they have to break the contract?

Excellent question, Mr. Reece. It depends at what point of contract that happens, but generally if you are in the middle of the contract there are some notices required to as an example certain contracts would require several weeks of advance notice, some contracts would not. Over the years we have not experienced really much cancellations at all, typically the public agencies, when they signed the contract typically the budget is already on hand and so therefore the risk for cancellation is minimal. There are some other types of contracts what they refer to as On-Call as an example that an agency has the relationship with us and we are their On-Call technology service provider and they would give us task orders and they might be telling us that well over the next year we have budgeted let’s say $2 million worth of task orders and there might be about a dozen task quarters each coming through for $100,000 to $200,000 and we would be spending those. On some of those because those budgets might be dynamic and valuable they might say that look yes, we told you that they might give you some additional task orders but we are going to stop this one next week and at the moment we may not have additional task orders. So, we have some of those as well, they are not significant but they are overall one of the beauties of public agency work is that when the contract is signed more likely you will go through the project and complete it. Does that help, sir.

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Silicon Valley Bank, yes sir.

Why did you continue the relationship with them, because I’ve had look at them and there were good bank?

Sure, I’ll briefly comment and then I’ll let Jim Miele our CFO add if he wishes to. We had a great working relationship with the Silicon Valley, we really enjoyed their services and products and the staff that we worked with. We felt by the way we were approached by no less than half a dozen different banks that wanted to lend us money. I have to make a light of the situation I heard out today, someone said that, when it’s sunny they will give you an umbrella, when its rainy they take the umbrella, right.

Right.

So, it has been steady, without business we have been quite fortunate the way we are, but just back to the banking situation, we were meeting with several banks just wanted to see what the alternatives are, we went through a very methodical process really kudos to Jim Miele our CFO and his staff that we went through line item by line item identifying what would suit Iteris at this business life of Iteris, which bank would suits us best and we concluded that California Bank and Trust was the bank doing that, they were quite flexible, we did due diligence on them. We were quite comfortable with their stability, they were very comfortable with our stability. They were happy with the markets that we are in, the cash flow that we have, the visibility that we have and overall we felt very comfortable with their staff as well and financially we felt that they provided the most flexibility for us. So, it wasn’t sort of a slam dunk moving from one bank to the other. Silicon Valley would have, we stayed with them, I trust that they would have continued providing us a great service but just an incremental better fit with California Bank & Trust made us make the move. I will pass on to Jim, if you wish to add to it? James S. Miele: I must reach that term that pretty much sums it up. We have not yet disclosed the full details of the loan deal but there are also some significant savings in terms of interest rates on both the revolving line of credit and the term note. Additionally, we switched from an asset based line under Silicon Valley Bank to more of a revolving line of credit which enables the company to borrow the full amount of the 12 million in any given time so we are more of a cash flow lender than an asset base lender and additionally there were some substantial savings for the company in terms of loan fees over the life of the loan. So, all those things combined, the structure, the fit, the cash flow savings to the company, we made the decision to switch.

Right, thank you for answering my questions.

Thank you, sir. James S. Miele: Thank you.

[Operator Instructions]. With no further questions in the queue I would like to turn the call back over to management for closing remarks.

Well ladies and gentlemen again, we appreciate everyone’s support and look forward to updating you on our continued progress. Thank you very much.

Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect. Have a great day.