Kevin Daly - Interim CEO Andrew Schmidt - VP, Finance and CFO

Jeff Van Sinderen - B. Riley & Co. William Meyers - Miller Asset Management Manoj M. Nadkarni - ChipInvestor Group LLC

Good afternoon everyone and thank you for participating in today’s conference call to discuss Iteris’ Financial Results for its fiscal first quarter ended June 30, 2015. Joining us today are Iteris’ Interim President and CEO, Mr. Kevin Daly; and the company’s CFO, Mr. Andy Schmidt. Following their remarks we’ll open up the call for your questions. Before we continue we would like to remind all participants that during the course of this call we may make forward-looking statements regarding future events or the future performance of the company which statements are based on current information, are subject to change and are not guarantees of future performance. Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ substantially from what is discussed today and no one should assume that 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 August 31, 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, Aaron, 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 first quarter of the fiscal year ending March 31, 2016. Andy Schmidt, our CFO and I will provide you an update of our progress over the last two months since our previous call. Before Andy provides the financial update I want to spend a few minutes covering our overall progress. At Iteris we’re a leading provider of information solutions for the intelligent traffic systems and the precision agriculture markets. In the ITS market, the intelligent transportation system market, we’re focused on the development and application of advanced technologies and software based information systems that reduce traffic congestion, provide measurement, management and analytics to improve the efficiency and the safety of transportation systems. In the agriculture market we combined our unique intellectual property with enhanced soil, land surface and agronomic modeling, utilizing our adaptable and power computing architecture to create a set of ClearAg solutions that provide both analytical support to large agriculture enterprises and field specific advisories to individual producers. As we discussed last call we’re focused on the company’s progress in these two markets, which we will refer to generically as transportation and agriculture. We’ve seen continued expansion in our transportation business. We remain encouraged by the developments we’ve seen in our traditional areas of expertise and see significantly expanded opportunities in transit, traveler information, analytics and both RF and hybrid sensing for arterial traffic management. We’re also seeing an uptick in traffic analytical support for both highway and arterial networks. In addition to our continued strong bookings we’ve proposed on several major initiatives that will be awarded within the next few months. In addition to these linear developments in transportation in the last several months we’ve witnessed a substantial enhanced interest in the area of connected vehicles, which Iteris sees as a major energizing trend in transportation over the next several years. We see a wide range of both tactical and strategic opportunities for Iteris in this area. Last month, Iteris participated in one of the most important recent connected vehicles events, the grand opening of Mcity, a major connected vehicle test bed and evaluation facility at the University of Michigan. Along with other major industry partners in the venture such as Toyota, GM, Qualcomm and Verizon, Iteris demonstrated advanced sensing and control technology as well as an integrated traffic management center. We believe the incorporation of both Iteris hardware and Iteris software into this important national resource will strengthen our presence in the market and will enhance our ability to develop near term support in the connected vehicle area. While it is still early in the world of connected vehicles we believe that Iteris’ technology and our deep relationships with a number of the key players in the area will enable us to develop meaningful business opportunities that will complement our traditional initiatives in the transportation market in the coming quarters and years. As we described in June, Iteris is committed to a major initiative, ClearAg, in the agriculture market. We have made significant advances in ClearAg over the past several months. At this point we’ve completed a number of evaluations with global agro businesses and released an initial version of our ClearAg app for individual producers in May. We’ve seen the initial adoption of ClearAg at both the enterprise and at the retail level. We’ve also announced the integration of ClearAg into a leading FMIS, that’s a farm management information system platform from Conservis and we are in contract negotiations with a number of agro businesses that can benefit from ClearAg’s science and technology. We’ve also continued our success in pursuit of IP protection for our analysis and advisory services. Of the ten patents we have had issued or allowed since the beginning of Q1 of this fiscal year, seven of the issued patents and one allowed patents were in the agricultural area. Of significant note we had a fantastic show in the InfoAg at St. Louis in the fourth week of July with over 30 meetings with potential ClearAg partners and customers of global scale many of whom actively sought us out at the meeting. We were very pleased with the success of the ClearAg branding strategy and the solid interest in the science and the technology behind the ClearAg advisories. Although the investment rate in Agtech startups has increased substantially with the run rate currently of $4 billion through the first half of 2015 against the total of $2.4 billion for all of 2014 it’s become evident from our discussions with potential customers that the stability and maturity of a public company, even one new to the space is a distinct advantage for Iteris. These organizations are looking for long term relationships with partners who can have a durable economic and operational impact on their business. They need to be confident that we will be there for them once the current fury of interest in the Agtech market has cooled down. As you might imagine this area is developing rapidly. However we anticipate that the market presence we are beginning to establish will support the business activities we forecasted for the current year. While we are discussing a wide range of business relationships, most of them represent significant levels of recurring revenue for ClearAg advisory services. I will talk to this with more specificity after Andy’s financial discussion. Andy?

Thank you, Kevin. Good afternoon everyone. First of all before I go through our fiscal first quarter 2016 financial highlights, I would like to bring to everyone’s attention that we’ll be talking to both GAAP and non-GAAP results today. Staying consistent with our fourth quarter and year-end call I will provide a non-GAAP view of our fiscal first quarter 2016, that adjusts and highlights what management feels are atypical operating expenses that better present the performance of the company in fiscal Q1 as well as to provide a more relevant benchmark of operating expenses going forward. Specifically, our non-GAAP results adjust for audit fee overruns as well as fees associated with our CEO transition. Looking at current period results we experienced audit fee overruns and financial consulting support fees totaling $376,000 in Q1 of 2015 and approximately $319,000 in fiscal Q1 2016. We also recorded $86,000 of costs associated with the changing of the company’s CEO this quarter. 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, Q1 was a good quarter. Total revenues in the first quarter of fiscal 2016 increased to $18.4 million, compared to $18.1 million in the same quarter a year ago. This is primarily driven by an increase in transportation revenues led by a 10% increase in our Roadways Sensors segment. More importantly gross margin in the first quarter of fiscal 2016 was 41.6%, a significant increase from 37.6% the same quarter a year ago. The increase in gross margin was due primarily to a shift in revenue from our lower margin transportation systems business to our sensors business. That said we are working on improving our gross margins in our systems business and saw measurable gain this period. Revenue in our Performance Analytics segment was down slightly as we transitioned from transportation initiatives in this area to Precision Ag opportunities. As noted in the previous call we have increased our Ag sales and marketing investment this year and while we expect returns for this investment later this year and next year we have seen a remarkable increase in deal flow over the last few months. Non-GAAP operating expenses in the first quarter of 2016 increased to $7.7 million compared to $6.5 million in the year ago quarter. The increase was primarily due to planned investments in headcount, product development, sales and marketing expenses all related to our Performance Analytics segment. Non-GAAP operating loss for this first quarter was $41,000 or essentially breakeven compared to operating income of $281,000 in the prior year period. Non-GAAP net income for the first quarter was $59,000 or $0 per share compared to net income of $214,000 or $0.01 per share in the same quarter a year ago. Cash and cash equivalents at June 30, 2015 was $18.9 million compared to $22 million at March 31, 2015. Cash used in operating activities was approximately $2 million. However this is primarily due to the timing of accounts payable. As this is timing related we feel that operating cash flow is better reflected by operating margin, which was essentially neutral this period. Capital expenditures were approximately $320,000 and we continue to carry no debt. Regarding our stock repurchase program we repurchased 402,000 shares in fiscal Q1 at a settlement amount of $735,000. At June 30, 2015, we had approximately 2.2 million shares available to repurchase as per our plan. A healthy indicator of our transportation business is that of backlog, total backlog at the end of fiscal Q1 increased to $45.3 million compared to $38.8 million in the year ago period. This concludes my prepared comments on the financials and I'd like to turn the call back over to Kevin.

Thanks Andy. I'd like to add some details to our discussion in both the agricultural and transportation areas. First, agriculture, I mentioned earlier that we've made important progress in our ClearAg product and market development. More specifically we have at this point released APIs, Application Programming Interfaces for base content and models in the area of soil, weather and water, crop growth, soil moisture and temperature and leaf canopy wetness. We've also released a scouting data integration capability which is a four runner of a more general data integration interface that we will release later. Drawing upon these basic capabilities we've released four specific advisors; planting, test and disease, field accessibility and spray window. We expect to release the important harvest advisor based on our patented technology this quarter in time for the 2015 US cropping season as well as three additional advisors; nutrient, irrigation and UAVs, Unmanned Aerial Vehicles over the next several quarters. Based on market feedback we've also defined three new product families; ClearAg components, which are visualization objects sort of halfway between APIs and Apps for ease of integration into other systems. ClearAg MaaS, or Modeling-as-a-Service in which we incorporate proprietary customer models into the EMPower environment and ClearAg IOT, the Internet of things interface for third-party sensors and systems. At this point we proposed and are contracted for all five of these product families. We're very confident in achieving our strategic goal of having at least a million acres under management this year and are pleased that the scale of the relationships we're discussing with the major agro businesses will provide us a sustainable level of recurring business over the rest of the year. We have been successful in adding talent for both market and product development to the ClearAg team consistent with our plan for this fiscal year. We expect to continue this process through the rest of the year but we will dynamically adjust the specific positions to respond to market and customer demands. We've assessed our facilities and infrastructure and believe we can accommodate the needed growth in both over the next 12 to 18 months without a need for major capital investment. The agriculture opportunity for Iteris is developing at an extremely rapid rate. We've adapted both our products and our business structures to reflect the interactions we’ve had with potential customers, partners and other interested parties. While none of these changes have substantially altered our strategic approach, they are we believe providing us an important differentiation in the market. Several trends are indicative of the changes we've made over the past quarter. The first is the introduction of the new component line which I mentioned earlier. This new class of products significantly enhances the ability to integrate ClearAg with third party software systems such as SMIS, as illustrated by our recent Conservis customer announcement. The second is incorporation of an element of customer specific engineering as a component of major ClearAg relationships. This maybe reflected as modeling-as-a-service or other purpose designed auxiliary capabilities that address unique interests of the customer. We recently announced our first ClearAg modeling-as-a-service contract with the Minnesota Wheat Growers Association. Going forward, we anticipate that our deal flow will become increasingly international and will align closely with the seasonality of the local agriculture markets. It's impossible to call the timing of larger deals exactly but since they are primarily driven by the inherent timing considerations of the agricultural business we believe that our expectations are realistic on a quarterly basis. We're also beginning to see a strong pipeline of more modest sized deals that will enhance our market presence although they will have a limited impact on our near-term revenue recognition. Overall, we're very pleased with the rate of progress that our ClearAg team is making and are increasing confident in our ability to deliver to the plan which we adopted for this year. Meanwhile the transportation market, our sensors business showed financial strength in both revenue and profitability. This is primarily due to our continued competitive success and the improved margin associated with both renewed core product lines and some OEM products. Most importantly, our current product offerings significantly broaden the technology and product base of our sensor offerings and support our overall transition to a more information dense solution for our traffic management customers. With the current emphasis of managing complete roadway use, for example, the Complete Streets initiative, important differentiating features of our product such as bicycle detection are also gaining recognition as a valuable resource for our customers. While we've added new talent into our systems' activities in the transportation area we fell a bit short of our plans of applying the staff against the backlog in Q1. We expect this will realign to our plan in the coming quarters. Meanwhile, we've strengthened our backlog of systems' contracts and have some major multi-million dollar proposals that we expect to be decided within the next quarter. We're also seeing an uptick in the commitments to our traffic analytic services. While these efforts remain modest in scale they help us to establish a growing footprint in the important area for future business. Finally, while connected vehicle area has not matured to the point of providing us specific business opportunities at this point, we believe that our increased presence in this market, coupled with our historic leadership and the systematic definition for connected vehicles, we are, if you remember, the authors of the connected vehicle reference implementation architecture for the U.S. Department of Transportation. We believe this will provide Iteris new opportunities as the market becomes better defined over the next year. Overall, we believe we're seeing a very positive transition in our business in both agriculture and transportation. We expect these transitions will continue to augment our core business base and we see a number of specific opportunities for both growth and increased leverage for the company. Thank you and now we'll be glad to take any questions you folks may have.

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

Good afternoon, everyone. Kevin maybe you can just walk us through a couple of things related to, I think you ended the call speaking about growth and leverage. If you can maybe touch on roadway sensors based on what you're seeing there, that business seems pretty healthy. Do you expect it to continue to grow at a similar rate, would you expect it to accelerate based on what you're seeing or any color you can give us there?

Sure. I think it's growing at a very aggressive rate and we think that that actual growth rate is sustainable for a while. It is a modest sized market and so you obviously can't do that forever. But I think over the next couple of quarters we are looking for continued pretty aggressive growth in that area. And we feel that because not only is the overall market doing well but we've brought new products into the area and they're not just new versions of old products, they're new technologies and new approaches for the customer. So I think we've got some pretty healthy growth in front of us.

Very good. And then you also mentioned that the Ag, precision Ag pipeline is growing. Maybe you can speak a little bit more about the Conservis partnership, how that’s structured, maybe give us a sense of that because it does seem like you're aiming for a recurring revenue model. Anything you give us on kind of what the rollout with them is, when revenues should start to ramp and I guess what metrics we should anticipate that you would share in the future?

Sure. And Conservis I think is -- excuse me, is turning out to be suggestive of our initial relationships with a number of these organizations. I think for the next year our relationship with Conservis will look as much like a OEM relationship as it does a relationship to the individual partners of Conservis or the individual clients of Conservis. And so we expect to recognize revenue in that essentially immediately but at a modest rate as they begin rolling it out to their clients. And I think this year that will remain a very interesting but sort of a modest monthly earned revenue. And then at about the one year point I think we and Conservis will look at how best to approach the larger customers that they have with a joint business approach to bring more of the ClearAg support to their customers. So I think it is starting right away, it’s starting at a modest level, it has the potential for a much bigger recognized revenue but I think we won’t see that, that uptick until roughly a year from when we started on 1st July, when they will have been through getting in front of their customers, doing some of their own evaluation integrations and so would be, I think that will shift gears in about the one year point.

Okay, and then we think that you’re working, I know you’re working with others maybe similar to Conservis, and maybe you can just give us a sense of what you think needs to happen for some of those other, I don’t know if you want to call them trials or tests or what have you, to come to fruition and maybe where -- how we should think about timing for some of those and maybe if you can just remind us what the timeframe with Conservis is, is that one that we should think about as sort of a model for others or how should we think about that?

Okay, let me try to speak to a couple of those points I think what we’re learning is each one of these in a sense is a bit different in nature than you kind of cartoon, when you start saying this is how we’re going to do business with people. Conservis, the time from really first serious discussion to contract was actually quite short. It was less than two months if I remember correctly. So it was very encouraging from that point of view. It was an integration which was unusual for us. We had not anticipated doing an integration with the ClearAg products this early in the game and so that was somewhat of a different. In terms of other relationships that we’re currently working, I think we’re -- and you never are completely past, but I think we’re largely past the evaluation phase. We’re now discussing business relationships, contractual relationships and how we’ll do things. In some cases we’ll have a period of time with them before they aggressively roll it out in to large parts of their user base. But I don’t think we’re facing, what we were facing four or five months ago which was evaluating -- companies evaluating what we’re doing to see if it worked in fact in their environment. I think we’re -- you are never completely past that, but I think we’re largely through that and so now we’re at structuring relationships that make sense for both of us. I think because we tend to be dealing, in many cases with relatively large organizations their ramp periods will be slow, in that they won’t instantly ramp this out to huge parts of their population. And so I think what is probably illustrative of the Conservis deal is that once we have an established relationship with them, my belief is that the first year will be a year that we’ll have, on the one hand a bit more technical support than we would see on an ongoing basis and a bit slower ramp but I think setting the basis for rolling it out on a broader basis going forward. And to some extent that will open up some new relationships with these companies. If they aren’t using it entirely internally they may choose to be a vehicle to market for some of our advanced products and so those relationships we are also open to.

Yeah, Jeff this is Andy. So just kind of building down in the structure to help you in the modeling, first of all we like to talk to Conservis revenue coming on modestly because it’s basically amortized, let’s say, over a year period. It’s a ratable treatment. It’s the largest Ag deal we’ve ever done. So it’s a tremendous win to-date and as Kevin said we have more than a few in the contract stage that will even be larger. We’ve got very many in the backlog, in terms of getting to, so the last few months has been tremendous growth in terms of our backlog and real actionable deals. These aren’t deals that we’re just talking to people about, these are deals that we’re defining scope and going forward with. What you should expect is, as these are OEM deals there is going to be a certain amount of integration that looks like non-recurring engineering and follows with what looks like a subscription. However the way we’ll treat them is ratably over a year period, so that you’ll see an even revenue treatment over a period of a year and then the subscription part of it, if you will, we’ll renew following years. So you will see a nice even revenue flow from these deals and as you would expect, it [ladders] [ph] up more deals we have, the bigger the recurring revenue that you will see as it hits. So it won’t be spiky, it will be very smooth. The bright part of this business too in the commercial segment is they pay cash very quickly. So on one part of our side of our house and transportation, it’s agency business which has closer to a 60 day accounts receivable. On the commercial side they are paying within terms, within 30 days depending on how we set up the contract. So it’s very fast cash and we should start building up a deferred revenue balance on the balance sheet that you will start being able to recognize.

Okay, that’s great to hear. It seems like you guys are making a lot of progress there. Maybe we can just shift a minute to the systems business, it seems like overall that was a little below what we are looking for. However your gross margins generally are trending better than what we are looking for. So I guess any sense there of what we should be looking for in the near future, maybe how systems is shaping up in the backlog, your overall backlog looks really strong, any shift toward more prime or subprime?

I think that’s a very good observation. With obviously our growth focus centering combination of the sensors business and the Ag business what we’ve been doing with the transportation business is being quite a bit more careful in terms of the kinds of business that we undertake and how we go about servicing it. So we’ve, in a sense relieved them a bit from the need for top line growth but really increased the pressure to ensure that we are getting gross profit at good levels from the business. And so that has caused a bit of a dampening of the growth rate. It isn’t systematic I think we will catch up on those things but we are being more careful and I do think that we will be able to increase the margin in those businesses in a sustainable way going forward.

Okay great, thanks for taking my questions and continued success.

Thank you very much Jeff.

[Operator Instructions]. And we’ll go next to William Meyers with Miller Asset Management.

Hey how are you?

Hi Will, how are you?

I am fine. Let’s see, on the transport analytics you used the word transition from at one point and then you also said there was an uptick in transport analytics, and so I just wanted to get a better feeling for what you see the future is for the transport analytics part?

Sure and let me try and be consistent about that. We have -- over the past couple of quarters we’ve seen really a diminishing set of opportunities for that business partly due to the fact that we felt one of the driving motivations was doing to be the Map-21 transportation plan which had requirements for more analytical support for transportation operators, that was all getting delayed. And so we saw the opportunity sort of moving to the right rather quickly. In the last few months some of those opportunities have developed actually and begun picking up a bit. It’s a small level of activity and we are talking about a couple of million dollars of the overall mix. And so I don’t believe that it’s going to turn out to be systematically significant in terms of the top line revenue but we do think that it does provide us a strong differentiation in the market in those opportunities that we are able to service. So I think it’s getting healthier but it’s not a big piece of the overall equation and we are being careful in how we invest in it to ensure that we are matching what the opportunity is. But last quarter I think we would have said we see those -- all those opportunities moving significantly to the right. In the last quarter we have seen a bit of, of them coming back but again we are talking about movements of relatively small numbers.

Okay, that makes sense. Thanks. And my other question was if you could do a little bit of an explanation about, people are talking about autonomous vehicles like the Google Car. And is that the same thing as connected vehicles, what would differentiate those, and where does your company fit into that picture.

Sure, if it goes faster than 25 miles an hour it’s probably a connected vehicle, not an autonomous vehicle, the easy way to think about it. Well autonomous vehicles in a sense are the ultimate goal of an awful lot of what people are doing. The idea is after all I don't need the person in the middle of this. But of course it brings out a lot of very, very complicated issues in how you make something like that operate well, particularly in a congested urban environment and essentially you can make it work on freeways relatively easily. Short of that technically is the fact that if you can communicate with the vehicles on the road, you get information going both ways and both the infrastructure people, the people operating the transportation networks and the vehicle themselves can do a better job, even though they're not autonomous. I mean there is a driver in them but they're getting better information on what to do, they're getting alternative routing and they're also providing feedback back to the system about which routes are more heavily used, what the average speeds on certain routes are. So it is a much broader set of initiatives but also ones that have the ability to start very, very quickly. And in fact, in some cases there are initial deployments of things that start looking like connected vehicles already out there. One of the reason that's a particularly attractive market to us, other than the fact that it has the potential for developing a lot more quickly than fully autonomous vehicles is that the other side of that interface, the other side -- not the vehicle side but the other side are the local operating agencies that are our customers. And so we have a very natural relationship with them in how that whole thing works. So as I said it's still early in that particularly to think about it systematically, but we believe that we've got some key elements in how to make those kinds of systems begin to be deployable and supportable in a meaningful way. And right now what you'll hear mostly is being -- is coming from the communication folks and from the vehicle folks that are looking for competitive advantages with those kinds of things. But it has big implications for how well, particularly their arterial network infrastructure works. And for that to work, all those -- that information has got to get integrated into the decisions that the infrastructure makes. And that's exactly where we sit in the process. So we're quite optimistic that that's going to lead to a renewed level of interest on the part of the traffic agencies on how to take advantage of this and some increased expectation on the private public about what kind of information they are going to get on where they're going.

Sure and just a follow up, would you say that your investment in that area is going to be funded by grants to your customers or is it going to be out of your own money?

No, it's not going to be funded by grants. What we do will be funded by our own internal R&D until it gets to the point where we've got a product or a service that we can work directly with customers. But no we aren’t looking for external grants for that.

Okay, well that's all from me. Thanks so much.

Okay.

And we'll go next to Manoj Nadkarni with CIG. Manoj M. Nadkarni: Hi, good afternoon. Most of my questions are answered, but I have one question. For your roadway sensors and for transportation businesses, what type of seasonal trends do you expect for the current quarter and the December quarter?

We have traditionally -- this is traditionally a very strong quarter for the sensors business, the second quarter because the weather is good. The third quarter is a pretty typical quarter for us. The winter itself tends to be a somewhat lower quarter just because installation of systems tends to slowdown in that area. I don't think we anticipate huge seasonality in the sensors system but there is some. And right now we're in the two strong quarters of that business. I don't think we see appreciable seasonality in the systems business. That tends to be longer term involvement. And so we don't see the same kind of effect there. But I would expect this quarter and next quarter to be probably the two strongest quarters of the year for the sensors business. Manoj M. Nadkarni: Okay, very good. And regarding your stock buyback, you said you have 2.2 million shares available for repurchase or is the dollar amount?

2.2 million shares available. Manoj M. Nadkarni: Shares available for repurchase, all right, thank you.

And at this time this does conclude 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. We are, as I hope, we were able to convey tremendously enthusiastic with how the year is developing. We think in both of our areas we’re seeing really good opportunities. We’re particularly excited about the fact that I think we’ve kind of broken the ice of getting into the agricultural business and hope the rest of this year we’ll start validating the fact that the products and the science behind them are really substantial and attractive to the customers. So we will keep you up to date, we would hope next quarter to have as many new and different things to talk about as we did this. But thank you very much. We’ll talk to you then.

And this does conclude today’s call. Thank you, ladies and gentlemen for joining us today for our presentation. You may now disconnect.