Abbas Mohaddes - President, CEO Craig Christensen - Interim CFO

Richard Magnusen - B. Riley William Meyers - Miller Asset Management Bob Sales - LMK Capital Management

Good afternoon everyone and thank you for participating in today’s conference call to discuss Iteris’ Financial Results for its Third Quarter ended December 31, 2014. Joining us today are Iteris’ President and CEO, Mr. Abbas Mohaddes and the company’s Interim CFO, Mr. Craig Christensen. Following their remarks, we’ll open 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 statement 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 February 19, 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’ President and CEO, Mr. Abbas Mohaddes. Please go ahead, sir.

Thank you, Justin 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 third quarter ended December 31, 2014. Our core roadway sensors business continued its momentum into the third quarter with the sixth consecutive quarter of double-digit year-over-year revenue growth. Similar to prior quarters, the distribution of third party products for the intersection market and the expanded domestic sales of Vantage products have been significant growth drivers. In our transportation systems business we followed last quarter’s strong increase in backlog with another $7.6 million in new contracts for a total of $27.3 million this fiscal year revealing the underlying strength in this market. In fact, year-to-date added backlog in this fiscal year is up 28% compared to the prior year. Our new iPerform ClearAg products also continued to gain positive reaction led by launch of ClearAg Prime in December. iPerform’s product adoption is further reflected by our recently announced partnership with BASF, the world’s leading chemical company, to provide our field level predictive weather information solutions. I will have more to say about this relationship as well as our overall business after Craig walks through our financial results. Craig

Thank you, Abbas. Good afternoon everyone. Total revenues in the third quarter of fiscal 2015 increased 6% to 17.5 million, compared to $16.5 million in the same quarter a year ago. This was primarily driven by a 10% increase in Roadway Sensors and a 4% increase in Transportation Systems revenues. The increase in Roadway Sensors revenues was primarily attributable to the success of various growth strategies, including increases in our distribution of third party products for the intersection market as well as higher unit sales for key products in our Vantage detection line. The increase in Transportation Systems revenues was primarily attributed to the execution of our growth plans resulting in strong backlog growth. Gross margin in the third quarter of fiscal 2015 increased 170 basis points to 39.1% compared to 37.4% in 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 higher labor content and timing of revenue recognition on certain projects. The increase in gross margins was also attributable to higher roadway sensors product sales enjoying higher gross margins than our other business segments. Roadway Sensor sales increased to 46% of total company sales compared to 44% of the same quarter a year ago. Operating expenses in the third quarter of fiscal 2015 increased to $7.5 million compared $5.9 million in the year ago quarter. The increase was primarily due to planned investments in headcount, product development and sales and marketing expenses and iPerform. To a lesser extent the increase was also attributable to professional services to complete the company’s first and second fiscal quarter financial statement review and to further improve internal controls and processes. Operating loss in the third quarter was $593,000 compared to operating income of $309,000 in the year ago quarter. The company continues to utilize the profits from Roadway Sensors and transportation systems to fund the planned investments in iPerform. Net loss in the third quarter was 98,000 or $0.00 per share compared to net income of 238,000 or $0.01 per share in the same quarter a year ago. Cash and cash equivalents at December 31, 2014 was $21.1 million compared to $20.4 million at March 31, 2014 and we continue to carry no debt. On November 6, 2014 our Board of Directors approved a $3 million increase to our existing stock repurchase program bringing the total available funds to approximately $3.1 million. We are currently in process of establishing a new 10b5-1 repurchase plan for this program. Since implementing our 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. Total backlog at the end of the third quarter of fiscal 2015, increased to 40 million compared to 36.8 million in the year ago quarter. The increase in backlog was primarily due to gross initiatives in our transportation systems segment. Backlog at December 31, 2014 was comprised of 32 million from transportation systems, 3.7 million from Roadway Sensors and 4.3 million from iPerform. This concludes my prepared comments on the financials. Now, I’d like to turn the call back over to Abbas, Abbas?

Thank you, Craig. As I indicated in my opening remarks, we reported the strong results in our fiscal third quarter particularly in our roadway sensor business which has experienced double digit year-over-year growth for six consecutive quarters. We were also pleased to see the number of new contract awards and kick offs in our transportation systems which remains strong. While our iPerform legacy business was down slightly this quarter, our outlook for this business remains very strong. 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 Sensor business continue to gain market share, particularly our Vantage Processor and Camera systems, our Velocity products as well as our SmartCycle, SmartSpan and VantageNext products. As a reminder, SmartCycle combines video vehicle detection with bicycle detection in one, while VantageNext is one of the industry’s most advanced video detection platforms with enhanced remote management functions. We plan to continue focusing on our international distribution channel for this business and expect to continue our channel expansion and refining products that address these markets, namely our P10 and P100 video detection products. Our transportation system sales were up 4% during the quarter. We have focused on capturing new major contracts in this business expanding our backlog and fulfilling our project work. In fact we recently completed a $1.5 million project to expand Virginia’s “Reach The Beach” traveler information program. This project expanded upon our highly successful 2012 launch and included the implementation of new comparative travel time signs along three inter states connecting central and eastern Virginia. We completed this project within seven months and it reflects our ability to grow revenues organically through existing client’s relationships. We also plan to expand our presence in certain markets in the U.S. where the transportation business is experiencing more traction such as Texas, Florida and certain states in the Midwest. To this end, we are pursuing several major projects in each of the targeted regions and plan to add a staff in those regions aligned with our strategic plan. Now onto our iPerform business which we believe has the tremendous growth opportunity for the company and we are currently in an investment cycle. As a reminder, our current suite of products can be broken down into three primary categories; first, iPeMS. iPeMS is a performance measurement and traffic analytics application for both public and commercial markets. We continue making progress both in product development and customer acquisition. We recently completed development and performance measurement of key parameters aligned with federal highway requirements. Several new contracts were signed including an I-95 [ph] award in Maryland and new awards in Wyoming and Pennsylvania. Second, ClearPath Weather which is a road weather decision support solutions for the state and local transportation agencies. It provides winter road maintenance strategies and helps optimize the deployment of personnel, material and equipments. New significant wins for ClearPath Weather in the third quarter includes new [Indiscernible] and Colorado state contracts. In the quarter, we also successfully penetrated into local agency and municipalities markets and signed over 60 new customers. And finally ClearAg, our big data and analytics platform for precision agriculture. Our focus here is the commercial market this we believe should propel our overall growth. The ClearAg product line provide decision support services to help provide more efficient crop management, effective chemical application and to reduce risks throughout the crops lifecycle. These weather, soil and plant [ph] help services improve bottom-line performance for growers and agribusinesses throughout the industry. ClearAg targets agribusinesses in the genetics and crop protection, crop nutrition, crop risk, and retail sectors. I like to elaborate on why we are so excited about the ClearAg business opportunity. We believe the global agricultural market place is at a point where a significant paradigm change is imminent. Recent studies indicate that the world will need to produce 70% more food if our population is expected to grow to 10 billion over the next 30 years. Tradition of precision agriculture has been characterized by a specific hardware and software offerings such as yield monitoring systems and machine guidance systems. We believe the market place is now transitioning to high value software and application services that leverage real time field and crop data collection, big data analytics and the creation of actionable information and decision A tools for farmers and agribusinesses that serve them. Iteris' ClearAg products help customers capitalize on this trend by using precision weather and soil information along with agronomic models to help agribusinesses throughout the growing cycle. For example, our products help identify the best time to plan, how to make the most of nutrient use, when to apply chemicals or irrigation systems and many other advisors. We also discontent and modeling services to Application Programming Interfaces or APIs and through our ClearAg mobile application. Our current ClearAg APIs products include our precision weather offering ClearAg’s collect [ph] and our global soil APIs ClearAg Prime. ClearAg Select was launched in June and provides growers with access to high resolution, field level weather information and mapping visualizations for real time decision support Once integrated into that information systems ClearAg Selects comprehensive solution should help top consultants, advisors and agronomous. Plan for field equipment activity such as planting, harvesting and in season crop protection measures. ClearAg Prime our sole API product launched in December is the first of our field level advisory services. The ClearAg solution combines the power of big data and analytics with the season experience of our in house’s staff of growers, agronomous, atmospheric and data scientists. ClearAg products are designed to help optimize crop production for leveraging Iteris’s history of precision weather and global soil content with real time land surface and plant help modeling services. Now that we have covered a couple of our differentiated product offerings, I like to provide more color on our go-to-market strategy for this business. Our recently announced partnership with BASF is a perfect example of how we plan to identify multiple opportunities with a single enterprise account. Company such as BASF use ClearAg content and agronomic models to solve problem such as allowing corn and soybean growers to quickly assess and response to health-related crop damage before fungus and other diseases have time to sit and cause further damage. Just want to reflect one avenue of sales to BASF. We have actually identified six individual and immediate opportunities for us to pursue including additional ClearAg opportunities in BASF’s U.S. Crop Organization. We intend to pursue additional opportunities with BASF and our intent is to become a strategic partner, which should allow us to transition our agreements into a global enterprise wide licensing model. At these levels of service enterprise account revenue for these strategic account in the plant protection and plant nutrient industries are expected to be in the range $1 million to $5 million per account. As weather plays and exceeding the important role in the decisions that need to be made across all sectors of Agri businesses. We expect that BASF [Indiscernible] relationship and other such enterprise relationships to develop into strategic partnerships that leverage our ClearAg products to help enterprises better understand and model the impact of the entire environment in which they operate from weather and soil to other agronomic services. Through these numerous partnership opportunities and our turnkey ClearAG product and services we believe there’s an immediate opportunity for iPerform to grow through subscription based revenues. We expect these opportunities to continue t expand as we rollout new product offerings and API, such as ClearPath mobile app, this new ClearAg application is currently in private beta testing and is excepted to be release to outside customers including leading crop protection manufacturers, Ag retailers and to system integrators later in this quarter. And we aren’t the only bullish on this opportunity. According to Ag Wire the precision Ag marketplace is expected to increase nearly 150% from today to $3.7 billion by 2018. This is not only expected to be the largest components of our $8 billion targeted addressable market, but we believe it is also our fastest growing market. As we can tell, we are very optimistic about the growth opportunity presented in precision agriculture marketplace. We plan to capitalize on our new customer relationships in 2015 and remain committed to continue growing our profitable core business segments and maintain our strategy of self-funding a strategic investments and deployment of iPerform. Now we would be delighted to response to your questions and comments.

Thank you, sir. [Operator Instructions] And our first question comes from Jeff Van Sinderen with B. Riley. Please proceed.

Hello. This is Richard Magnuson for Jeff Van Sinderen. And my first question is regarding the nature of the BASF deal, could you speak more about that please? And do you have any more deals like that that you’re working on? And if so what timeframe could we expect those in?

Yes. The BASF relationship is initially focus on providing services related to hail forecast and we are in discussion with them to expand that into other services including the soil, surface soil activities, to provide them additional mobile app activities, so that relationship initially is in U.S. and then we intend pursue expansion of that globally. And yes, we are in discussion with several enterprise level customers, as well as software management organizations, advisors to have a strategic relationship with them. Some of them are proceeding with us in beta test of the product I’ve just indicated the ClearPath Ag mobile. So that process is proceeding.

What level of revenue growth do you think is feasible for the company overall this year, which segment do you expect fuel growth and more specifically what levels of revenue should we think about for iPerform this year?

So as far as the core activities, core businesses, they continue to grow as we announced. We are currently preparing our fiscal year 2016 next year’s plan to present to the Board next week. And what we’re focused at the moment really is in terms of iPerform to offer our products, to really forge relationship with these customers and we have not provided any guidance as far as the specific revenue or profitability in the upcoming year.

Okay. And then, could you give us a sense of how much R&D spending you expect this year versus last year and what you plan for SG&A? And recently – in a recent presentation you noted that $4 million to $6 million have been invested in the iPerform over the last 12 months. Would you tell us how much of that was R&D and maybe more specifically how much that was for ClearAg?

So generally I could respond to that. We continue our investment in iPerform and those were the levels that we have done, it is accurate in the last 12 months. We are preparing the plan for next year to do that. I think I indicated in my prepared remarks that our intent is to really use the proceeds of our established core businesses to continue funding iPerform going forward. As far as SG&A, would you repeat the question please?

If you could give us a sense of your SG&A plan going forward?

Yes. We are not providing that at the moment. I might be able to in the future quarters add some color to it, but we are completing our preparation of our plan at the moment to present to the Board next week. But when you look at what we’ve been doing the last two or three quarters. We have published all those numbers and I don’t envision on immediate basis any significant changes to those numbers if that that helps.

Yes. It does. Thank you very much. Again congratulations.

You’re welcome. Thank you for the questions.

And our next question comes from William Meyers with Miller Asset Management.

Hi. First could you tell me you’re listing an income tax benefit somewhat substantial, is that an R&D tax credit or something else?

Yes. This is Craig. So primarily it’s from the operating loss that we’ve generated through the first nine months and part of it is also due an R&D credit that was extended just recently in December. So it’s the combination of both.

Okay. And my other question would be on – now that we have a new Congress, what is your view of the possibility of change in federal funding for Highways?

Yes. I’m quite optimistic Mr. Meyers. As you might recall last summer the Congress extended until end of May, a little bit over $10 billion for Highway funds. We have been paying a close attention particularly this last couple of months or so, there has been a new development, various ideas and opportunities are presented. One is specific one that seems to be getting some traction amongst certain members in Congress is have about $400 plus billion expenditure over the next six years, by part to be funded from corporate overseas taxes. And I remain optimistic about that opportunity to be forged before this extension is expired. But we also hear that if it does get delayed as we have seen it in the past that the more likely the current expenditure levels will continue. So, in summary we are optimistic now perhaps more than the last couple of quarters, because we’ll see some green shoots of the collaboration between both parties attempting to really put a plan together. And of course should that go through Iteris would be direct beneficiary of that in the upcoming quarters.

Thank you.

You’re welcome.

[Operator Instructions] Our next question comes from Bob Sales with LMK Capital Management.

Hi. Couple of questions, if I look at your investment to-date – and by the way congratulations on the BASF announcement.

Thank you, sir.

But if I look at the current quarter with respect to the investment iPerform, I think is up year-over-year, correct me if I’m wrong.

That’s correct. That’s correct, sir.

Using the base level of Q4 for 2014, can you give us some guidance as to whether or not you’ll think you’ll have higher level of an investment in iPerform going forward to support the opportunities or whether the current level of investment is sufficient?

Yes. I couldn’t Bob at the moment comment specifically about the levels of investment. We would be presenting our next year’s plan that fully includes the iPerform investment both in R&A and sales and marketing next week. And what is important is to realize that we are in an investment cycle. This is a major transformational, a new business for the company that we are headed into a software-based information organization with a significant commercial opportunity. So, what we are focusing on now is really to get this products in a timely fashion just the way we have done it last year in June and September and December and now in beta test on the mobile app have series of these products to the market and really forge partnership that enable these organizations to expand their revenue to reach out to the growers. So that’s really what we are focused and it is important for us to have that focus to really do this activity. So I would provide additional color in the way of investment as we go forward, a specific measures to see our progress, which I believe include getting the products to market and the forging relationship such as BASF and generating revenues, I think that’s really our overarching focus.

Got you. And then, do you – when you look at your enterprise level opportunity on the ClearAg size of the business, how many prospects do you think you have that are similar in size to BASF. They may not be the same type of companies in terms of their end market. But when you look down your list of prospects, how many do you think there are – that has a potential to be attracted to this type of big data capability for Ag analytics.

Several dozens and we are pursuing many more. Our goal really is within the next few years to have over $40, $50 million worth of software sales, I mean, that’s our plan and we invention that many of those would come through enterprise organizations, large BASF, but also some of them would come through other organizations retailers from Bureau insurance organizations. So it’s really a large group, although we are focus in four specific market segments within the Agri business. But we have reached out to over 100 of these organizations and we have active discussion with several dozens of those. I hope that helps.

That does help. And in the existing business for iPerform do you – how would you manage your expectations in terms of the iPeM ClearPath weather and ClearPath weather segment to grow, take constant or shrink in terms of their revenue going forward?

Well, the intent is certainly to grow them. I’ll start with the ClearPath weather. So one of the unique things that we did this last quarter, we have been selling through over 20 states so far. And so now we have developed a new business model by which we penetrate into local agencies and in fact we’ve signed over 60 customers selling, most of them in Minnesota new customers, so we plan to grow that in a way of enhancing our offerings, expanding our sales reach. And then when you get into iPeMS, iPeMS has two components in it. The public sector which we continue expanding, I indicated we just close the deal with Maryland, New Hampshire and other states. But another key component is our continued development and market penetration into commercial such as Telematics, Automotive. Our intent is to really put traffic and weathers together and offer that to Tier 1 automotive suppliers than others. So our focus is to grow both iPeMS and ClearPath weather. When you think of the government, the agency funding being limited while we continue growing that but the commercial opportunity in ClearAg is really where we are focusing vast majority of our R&D, vast majority of our growth we anticipate to be from that and that’s really in our minds the game changer for the growth opportunities for Iteris.

Got you. Okay last question for you. On the Roadway Sensor side of the business, you mentioned something you mentioned was your growth was aided by the distribution of third party products, did you mean that you are now distributing third party products within your to your end customers or your products are being distributed via other third party to their customers.

The former, so we have certain product that is strategically and functionally are aligned with our products that we sell. And for example in Texas where we [Indiscernible] and we already have the infrastructure and the manpower to offer additional equipment at intersection through our customers so we use third party equipments such as the equipment from Siemens and others at the intersection and we put them together, integrate them and offer them to market. We decided [ph] that about a year, year and a half ago and we have enjoyed a good traction and now is providing a good margin for us so we really are quite pleased with how that particular business line been helping us grow.

Okay, thanks for the answers and look forward to watching your progress.

Thank you very much. Appreciate the questions there.

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 any closing remarks.

We appreciate everyone’s support and thoughtful questions and look forward to updating you again on our continued progress when we report our fourth quarter in May.

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