Abbas Mohaddes - President and Chief Executive Officer James S. Miele - VP of Finance and Chief Financial Officer

Jeff Van Sinderen - B. Riley

Good afternoon everyone and thank you for participating in today's conference call to discuss Iteris' financial results for the fiscal fourth quarter and full year ended March 31, 2013. Joining us today are Iteris' President and CEO, Mr. Abbas Mohaddes; and Company's CFO, Jim Miele. Following the remarks, we will open the call for your questions. Before we continue, we would like to remind all participants that during the course of this call, we may make forward-looking statements regarding the future events and the future performance of the Company which are based on current information that are subject to change and are not guarantees of future performance. Iteris is not undertaking any 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 10-K, 10-Q 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 the webcast replay of today's call will be available via the Investors section of the Company's website at www.iteris.com. Now, I'd like to turn the call over to Iteris' President and CEO, Mr. Abbas Mohaddes. Sir, please proceed.

Thank you Claudia 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, 2013. We completed fiscal 2013 on a strong note with healthy Transportation Systems revenue growth, both year-over-year and sequentially, as well as improvement in our Roadway Sensors revenues, which grew 28% sequentially to $6.5 million. We shipped some of the orders that were delayed last quarter, by part due to Hurricane Sandy. The growth in Transportation Systems is attributed to increased marketing, progress in our East Coast region, and expanded backlog. In Roadway Sensors, we shipped some of the orders that were delayed last quarter. Additionally, we reinvested a portion of the cash flow from these two segments to expand our investment in iPerform and made significant progress in its software development. But before going into further detail about the quarter and full year as well as our outlook, I would like to turn the call over to our CFO, Jim Miele, who will take us through the details of our financial results. Afterwards, I'll return to discuss more of the highlights of the quarter and how we plan to build shareholder value as we move through our fiscal 2014 and beyond. Finally, we will open the call for the questions. Jim? James S. Miele: Thank you, Abbas, and good afternoon everyone and thank you again for joining us today. For the fiscal quarter ended March 31, 2013, total revenues increased 4% to $15.9 million compared to $15.2 million in the year-ago quarter. The increase in revenues was primarily due to a 6% increase in Transportation Systems/511 revenues as well as an 18% increase in iPerform revenues, which accounted for approximately 5% of our total fourth quarter revenues and was primarily related to the extended contract revenues. As there are different characteristics affecting each of our revenue streams and various attributes affecting our financial results, Abbas will provide more details regarding our total revenues later in his comments. Gross margin in the fourth quarter was 36.3% compared to 37.6% in the year-ago quarter. The decrease in gross margin was mainly the result of an increase in the sub-consulting content related to our Transportation Systems contracts and a slight shift in Roadway Sensors engineering activities from R&D projects to product support activities as well as increases in inventory and warranty reserves to support higher revenues. Operating expenses increased to $5.5 million compared to $5.4 million in the year ago quarter. Income from continuing operations was $69,000, or $0.00 per share, in the fourth quarter compared to income from continuing operations of $422,000, or $0.01 per share, in the year-ago quarter. Net income in the fourth quarter was $56,000, or $0.00 per share, compared to $358,000, or $0.01 per share, in the year-ago quarter. Net income in the fourth quarter of 2013 included the commencement of our accelerated investment phase in iPerform as well as $187,000 income tax expense charge related to certain net operating loss carry-forwards in California that might not be fully utilized prior to their expiration. Cash at March 31, 2013 was $19.1 million compared to $18.7 million at March 2012 and we continue to carry no debt. During the fourth quarter, we repurchased approximately 664,000 shares of our common stock for $1.1 million, bringing the total to approximately 2,097,000 shares for approximately $3.2 million since we initiated a series of share repurchase programs in August 2011. As of March 2013, we have approximately $1 million in funds remaining under the current repurchase plan. Total backlog at the end of the fourth quarter was $38.6 million, an increase of 9% from $35.3 million in the year-ago quarter, and up slightly from $38 million at the end of our third fiscal quarter in 2013. Backlog was comprised of $32.2 million from Transportation Systems, $3.3 million from iPerform and $3.1 million from Roadway Sensors. During the quarter, we signed $9.6 million in Transportation Systems contracts compared to $7.6 million in the year-ago quarter and $4.9 million in the third quarter of 2013. For the fiscal year ended March 31, 2013, total revenues increased 6% to $61.7 million compared to $58.4 million in fiscal 2012. The increase was primarily due to a 9% increase in Transportation Systems contract revenues and the inclusion of iPerform revenues for the full year, partially offset by a 6% decline in Roadway Sensors revenues. Gross margin was 37.7% compared to 39.5% in 2012. The decrease in gross margin was primarily due to the aforementioned increase in sub-consulting content as well as a decline in Roadway Sensors gross margin. As we discussed on previous calls, contracts with a high sub consulting content generally generate overall lower margins. With that said, our sub consulting content in Transportation Systems was 40% in fiscal 2013 compared to 35.6% in 2012. Our 2013 SG&A and R&D expenses were consistent with those in fiscal 2012. Additionally during fiscal 2013, we recorded a $1.5 million gain, net of tax, on the sale of our Vehicle Sensors segment in July of 2011. The gain was the result of release of funds related to certain holdback provisions and to a lesser extent earn-out provisions. Income from continuing operations in 2013 was $914,000, or $0.03 per share, compared to $1.3 million, or $0.04 per share, in 2012, while net income was $2.4 million, or $0.07 a share, and that compares to net income of $2.5 million, or $0.07 per share, in 2012. This concludes my prepared remarks on the financials and now I'd like to turn the call back over to Abbas who will further discuss the quarter as well as our strategy in fiscal 2014 in further detail. Abbas?

Jim, thank you very much. As I indicated in my opening remarks, our Sensors business improved sequentially in the fourth quarter and our Transportation Systems/511 business grew organically on a sequential and year-over-year basis. During the quarter, we announced the expansion of our iPerform traffic and weather related data and software segment with increased investments in both technical and market development. The commencement of this increased investment phase began midway through our fourth quarter and we began to allocate cash flow from our Roadway Sensors and Transportation Systems/511 businesses to support this investment. Despite this level of increased investment, we have still reported a consolidated profit. Our backlog at March 31 is also strong with levels also up both year-over-year and sequentially. We expect this momentum to continue into our fiscal 2014, but before I explain about our outlook, I would like to discuss our operating segments in more detail. Within Roadway Sensors, sales were up slightly over the same quarter last year and 28% sequentially, mainly because we shipped some of the orders that were delayed last quarter by part due to Hurricane Sandy. In addition, we made some leadership changes within the segment during the quarter, appointing Bill Sowell as the Acting Vice President of Sales and Marketing for our Roadway Sensors segment. Bill was serving as VP of Marketing and brings over 25 years of experience in the traffic management industry. I expect that his discipline and creative approach to market expansion will help us achieve our goals in this segment. We are experiencing traction with our Vantage Vector product, as its combined video and radar technologies provide added detection and help agencies improve operational and safety attributes both at and new signalized intersections. In addition during the quarter, we released two new Sensors products, SmartCycle and SmartSpan. Both of our software centric Vantage product suite address unmet needs in the marketplace and should further support our market leading position, with more than 100,000 video detection sensors in operation worldwide. We believe the introduction of new products, combined with continued demand of our existing technologies, should help sustain and grow our market leadership in fiscal 2014. During the quarter, we expanded our commitment in the international market, specifically South America and the Middle East, and have hired two seasoned executives to lead our sales and marketing in these regions. Several growth initiatives are underway such as partnerships and new market penetration that we will share with you in the upcoming quarters. Our Transportation Systems/511 sales were up 6% during the quarter, primarily due to increased marketing and growth in our East Coast region. Our investments in market development are paying off, resulting in additional contract awards and expanded backlog. We are also starting to seed infusion of funds from the Federal Highway Bill helping to expand the number of contract opportunities for us to pursue. We signed $9.6 million in new contracts during the quarter bringing our contract backlog to $38 6 million compared to $35.3 million in the year ago quarter. As an example, we were selected by the South Carolina Department of Transportation to upgrade and operate the state next generation 511 Traveler Information System. As we begin to upgrade the 511 systems in our state-of-the-art technology, we will incorporate the synergies of our iPeMS performance, measurement and management solution, which is expected to enhance certain aspects of this system. The three year contract valued at approximately $2.5 million includes two one-year options for ongoing operation and maintenance. The award strengthens our leadership position in 511 Traveler Information System as we currently operate 18 systems nationwide. Work on this project has already begun. We continue to believe our Transportation Systems/511 business is well positioned to capitalize on the recently passed Federal Highway Bill. We are beginning to see more requests for proposals from various agencies due to the Highway Bill. As we have indicated before, we believe we will be a direct beneficiary of the Bill and it should impact our revenues in the upcoming quarters. Our Performance Management segment, or iPerform, continued to make progress during the quarter. As we have discussed, iPerform was established in 2011 and provides a new generation of intelligent traffic and weather related information solutions. These solutions are expected to bring the power of big data to predicting traffic conditions and delivering actionable information to both the public and commercial marketplace. This segment's initial product, IterisPeMS or iPeMS, is a state-of-the-art information management software suite that utilizes a wide range of data resources and analytical techniques to determine current and future traffic patterns, permitting the effective performance analysis and management of traffic infrastructure resources. Late in our fiscal fourth quarter, we announced the beginning of an 18 month period of increased investment in iPerform. We are making this commitment due to our belief that the market for traffic analytics is expanding dramatically. Our deep knowledge of traffic engineering and weather forecasting, our experienced managing traffic measurements on a massive scale, and our state-of-the-art analytical capabilities should position us to put complex big data to watch, enabling our customers to predict and solve real-time traffic management problems. The expansion of iPerform reflects our broadening focus beyond the public sector to a wider market that should benefit from our information based products and services. iPerform's recorded revenue model is expected to supplement our consulting and product businesses and augment the overall profitability of our organization. We currently offer iPeMS as both a licensed and software-as-a-service offering. By increasing investments in both technical and market development, we plan to focus on expanding the scope of iPerform's public sector solutions into the commercial marketplace. Going forward, iPerform solutions are expected to include incident management applications, arterial solutions, predictive traffic, and weather-based data and analytics for both public and commercial markets, including media, automotive, and consumer applications. We plan to fund these investments through internally generated cash flow from our Roadway Sensors and Transportation Systems operating segments, as well as revenues from iPerform. It is also important to note that we expect to remain profitable during this 18-month period of investment. During the quarter, we made significant progress in the development of our new iPerform software platforms for traffic and weather information systems. We have also experienced significant customer demand and have identified a number of commercial opportunities in the media, automotive and mobile application markets. We recently signed our first commercial customer for our weather analytics solution and are in later-stage discussions with several commercial sector companies for iPerform's predictive weather and traffic data offerings. We plan to announce further details in the upcoming months. Now, before I provide my closing remarks, we will be delighted to respond to your questions and comments. Operator?

Thank you, sir. (Operator Instructions) Our first question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed. Jeff Van Sinderen - B. Riley: Just a follow-up on the iPerform, if I recall you guys were working on some sort of a strategic alliance or joint venture or something of that sort, some sort of partnership for iPerform, bit it sounds like you're still working on those sorts of things. Is there any more color you can shed there, just wondering if there's an update on that? And also maybe you can just tell us a little bit more about how the accelerated investment will play out?

Sure, and thanks for the question Mr. Van Sinderen. We did have about a year ago one particular partnership that we announced. We are discussing with at least two other organizations about specific partnerships that as they come about, we would be announcing. In terms of the activities that we're doing, really a tremendous amount of development and I would expect us to announce in the upcoming months and quarters specific technical milestone achievements as well as material or strategic customers that we would be signing up. We are, as I indicated, in later stages of discussion with some key customers that we're quite excited about the prospect of having them as our customers. So, the last quarter or two, I've been quite pleased with the reaction of the market for the types of services and products that we are in development and already have to offer in the marketplace. Jeff Van Sinderen - B. Riley: Okay. So I think you mentioned automotive and mobile applications for iPerform, and so I'm assuming that those are some of the types of players you would work on partnerships with or customers I guess, and so would we be talking – maybe you can just elaborate a little bit more on that and give us a sense of who or what type of companies you would be partnering with there and are those announceable events?

Sure. It will be announceable for the maternal arrangements that we will be putting together. At the moment, much of our focus, Van Sinderen, is on media companies. These are companies that own a large numbers of TV stations, radio stations, that we would be helping them to primarily automate much of their activities in traffic and weather information systems that they do. We would then, as part of this strategy into the automotive, is to go through other channels and not direct to OEMs but the channels that already provide information to the automotive organizations, but our information that really adds value to what is already available in the market is what those organizations would be interested in. So a typical contract would be providing, let's say, programmable application interface to some of these organizations putting together different APIs or perhaps populating content for those organizations that already have apps and reaching a very large number of customers currently. At the moment, it is not in our immediate plan to have our own app as an example. I hope this helps. Jeff Van Sinderen - B. Riley: It's definitely helpful. And then I know you mentioned, it sounds like the Federal Highway Bill funds are starting to be released, so maybe you can talk a little bit more about that, what you're seeing there and maybe update us on what you think the outlook is for that work or for work drives in the Federal Highway Bill to play out over the next couple of quarters?

Yes, so we are happy to see that the magnitude of requests for proposals are expanding in the marketplace, some of which are really funded by the Federal Highway Bill either directly, in total, or by part, and we see that magnitude and volume expanding. So, we propose on those already in preparation of some of those bids that we are preparing. So what that means as far as revenue for us, it will probably take about a quarter or two for us to really see the direct monetary benefits of those, but we're quite pleased with the outlook on that. Jeff Van Sinderen - B. Riley: Okay, good, that's great news. And then, is there anything, any more color I guess, I know you don't provide guidance but anything you can give us on how we should be thinking about revenues for the next quarter and maybe sort of revenue growth rate for the year? I know it's a couple of quarters out before the Federal Highway Bill revenue start to kick in but that and also maybe any sense you can give us with the increased spending or investment in iPerform, how we should be thinking about your R&D expenses, and then also SG&A, I think you mentioned that you're bringing onboard some new people, so any color you can give us there would be helpful?

Sure, let me address the second part of the question and then I'll go back to a discussion of the annual outlook. So as far as investment in iPerform, as we announced about a month ago or so, we are accelerating that and we are actually using a significant amount of the proceeds from the Transportation Systems and Roadway Sensors plus some of the profits that iPerform group generates itself to really fuel this investment. So, our R&D investment is expanding from a year-over-year standpoint, but what we are sensitive to is that over the next year or 18 months, we expect to stay profitable. So that hopefully would help. We don't expect really a significant amount of G&A expenditure but we do expect investing in sales and marketing as well, and particularly in iPerform. So, that's a group that is expanding. Just to give you a feel, over the last three quarters, we probably have added at least a dozen software engineers and others into that group and we're now accelerating that expansion. That group now has about 50 people or so in it. So, it's a major commitment on our behalf. As far as the first part of your question regarding an outlook, as you know we don't provide guidance but I could tell you that I would be very disappointed if we didn't grow this year, year-over-year. In fact, I would expect that to be in double-digits and be disappointed if we didn't. So we are planning to grow. I feel that our core, Transportation Systems and Roadway Sensors, we are positioned to grow primarily due to the new services and products that we have offered and also we see that the market itself is expanding. We are really focused on the more segments of the market that are growing faster than the rest of the traffic management market, and these are all the software-based activities that we are focusing on. And although in iPerform, we are in investment mode for some time, we also expect that particular group to grow as well, as there are existing software that we are selling, there are certain types of offerings that we are providing, the APIs as I indicated. So, all in all, I would expect a good year for Iteris. Jeff Van Sinderen - B. Riley: Okay. So if I can just follow-up on the iPerform a little bit more, I mean obviously it's a substantial investment and I think you mentioned 18 months, an 18-month period of investment, can you talk about any metrics that have been put in place to sort of I guess monitor that that's trending along the expectations of the Board and also are there performance clauses that have been put in place for meeting certain targets with relation to that investment in iPerform?

Very much so. So, we put together our [recent] (ph) business plan and presented that to the Board back in January, and that plan had very specific milestones, not only in the software development, four, five major milestones within the fiscal year and then additional ones beyond, but we also had specific performance and milestones in customer sign-up, not only in the public area that we currently enjoy but also in the commercial, and today, we have also put together the performance of the executives to reach this, is matched with those milestones. So, just to give you an example, we're having our Board meeting next week, we will be presenting to the Board our performance and various components of the milestones that we have set and (indiscernible) and how much we have achieved, and we are monitoring those very, very closely. I hope that helps. Jeff Van Sinderen - B. Riley: Okay, that does help a lot. Thanks very much and I'll let someone else jump in.

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

Okay, thank you, operator. Throughout fiscal 2014, we plan to focus on the areas of intelligent traffic management, we believe are growing faster than the overall market, by delivering technologies and solutions that are uniquely positioned to address these market segments. We also plan to further expand our sales, marketing and research and development teams, particularly within iPerform and anticipate reporting partner wins in both the public and commercial markets. These markets are in need of our intelligent traffic management products, information and analytics solutions, and we believe that our investments in these areas will build shareholder value. We appreciate everyone's support and thoughtful questions and we look forward to updating you again on our continued progress.

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