Joe Bergera - President & CEO Andy Schmidt - CFO

Jeff Van Sinderen - B. Riley

Good afternoon everyone and thank you for participating in today's conference call to discuss Iteris' Financial Results for its Fiscal Second Quarter ended September 30, 2015. Joining us today are Iteris' President and CEO, Mr. Joe Bergera; and the company's CFO, Mr. Andy Schmidt. Following their remarks we'll open your 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 for 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 November 24, 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. Joe Bergera. Sir, please proceed.

Great, thank you, Tracy, and good afternoon to everyone. As you saw at the close of the market today, we issued a press release announcing the financial results for our fiscal second quarter ended September 30, 2015. During the quarter, Iteris recognized a record $20.6 million in total revenue. This represents 12% sequential growth and 11% year-over-year growth. We believe the rate of both sequential and year-over-year growth reflects solid business execution. We saw particularly strong results in our Roadway Sensors business unit and we saw a nice improvement in our Transportation Systems business unit. Our precision analytics business unit also continue to make good progress in the market for precision agriculture and related category we refer to as agriculture analytics. Our Roadway Sensors BU contributed $11.6 million to our total revenue. This represents 17% sequential growth and 13% year-over-year growth for the BU. The strong performance reflects a continued positive market response to our high performance video detection centers to detect both vehicle and bicycle traffic at intersections. Iteris was the first to market with its dual vehicle and bicycle detection capability and we believe Iteris continues to benefit from first mover advantage. In addition to the excellent performance of our core video detection sensors, we saw excellent positive momentum in other areas critical to our business. Of note, we continue to see an increase in the rate of market adoption of our Vantage Vector product which utilizes a combination of video and radar, to enhance safety and reduce accidents by managing the dilemma zone at intersections. Our Vantage Velocity product which tracks the speed of traffic movement based on the MAC addresses or passenger Wi-Fi or Bluetooth devices also experienced an acceleration market adoption. Indeed, the City of Houston completed the largest installation of our Vantage Velocity product to-date. Our Transportation Systems BU recognized $8.1 million in revenue representing 10% sequential growth and 11% year-over-year growth. In addition to solid revenue performance the BU increased its year-over-year net backlog by $3.5 million to a record $35.8 million at the end of Q2. This represents 5% sequential growth and 11% year-over-year growth. This is a new record level of backlog for Iteris. The backlog growth reflects an increase in demand for our services across a board set of customers, but we also benefited from a number of key strategic deals. As announced in July, the Federal Highway Administration awarded Iteris a three-year National Intelligent Transportation Systems and Connected Vehicle Architecture contract valued at $5.8 million. We're starting to receive various task orders under this new contract. Large new programs of Orange County, Wyoming, and South Dakota, also contributed materially to backlog growth. You may have read last week that we announced a new almost $9 million Traveler Information Services Contract with the San Francisco Bay Area Metropolitan Transportation Commission. The new MTC program was a Q3 order which I will discuss in more detail in a moment. Our Performance Analytics business unit recognized $900,000 in revenue, representing a decline of negative 16% on a sequential and a year-over-year basis. These results reflect a decrease in transportation analytics revenue, offset in part by an increase in agriculture analytics revenue. The transportation analytics revenue decline is associated with several implementation delays which we expect to overcome in the second half of this fiscal year. The growth in agriculture analytics revenue is attributable to the timely availability of our new product suite branded as ClearAg, and the success in converting our growing sales pipeline including two particularly notable deals that closed in Q2. In July, Iteris entered into an OEM agreement with Conservis a leading farm management information systems platform to provide our ClearAg visualization components and advisory services to the Conservis user base in the United States. In September, we executed an agreement with Valent U.S.A., a leading crop protection firm. Under the terms of the agreement Valent will use our ClearAg API to provide premium field level weather, soil content, and crop protection, product performance applications to growers. At Iteris, we continue to pursue a strategy of patent before we publish. While we believe this strategy will enhance Iteris' enterprise value over the long-term, we believe the IP protection of particular importance in the agriculture analytics market, where we are especially vigilant to protect our degrees of freedom to operate. In Q2, we are issued six new patents that relate to our agriculture analytics business bringing the total patents for this business area to nine. Now I would like to turn the call over to Andy to walk through our financial results. Andy?

Thank you, Joe, and welcome to Iteris.

Thank you.

First of all before I go through our fiscal second 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 year-end call, and first quarter call, I will provide a non-GAAP view of our fiscal second quarter 2016 and year-to-date results that adjusts and highlights what management feels are atypical operating expenses that better present the performance of the company and to provide a more relevant benchmark of operating expenses going forward. Specifically, our non-GAAP results adjusts for audit fee overruns as well as fees associated with our CEO transition. Looking at our current Q2 period results, we did not experience audit fee overruns or financial consulting support fees as compared to incurring $1.25 million of such fees in Q2 of 2015. In regard to Executive management transition costs, we recorded $63,000 associated with the change of the company's CEO this quarter as compared to no such costs in the same period of fiscal 2015. For the six months period ending September 30, 2015, audit fee overruns and financial consulting services totaled $311,000 as compared to $1.6 million in the same period last year. Costs associated with the change of the company's CEO totaled $149,000 for the six months ending September 30, 2015, as compared to no such costs in the same period last year. Today's earnings release and the related current report on Form 8-K describe how we calculate these non-GAAP financial measures and provide a detailed explanation of our atypical expenses as well as the reconciliation between our non-GAAP financial measures and their most directly comparable GAAP measures. Okay, moving forward, Q2 was a great quarter. We posted record revenues of $20.6 million. Total revenues in the second quarter of fiscal 2016 increased to 11% from $18.6 million in the same quarter a year ago. The increase was primarily driven by strong transportation revenues led by a 13% year-over-year increase in our Roadways Sensors segment. Gross margins in the second quarter of fiscal 2016 were solid at 38.3%, down slightly from 39.3% in the same quarter a year ago, but within expectations. Changes in our gross margins are essentially product mix related across all our business units. As noted in our Q1 call, we continue to work on improving our gross margins in our systems business and saw another quarter of strong performance posting gross margins up 34% in that business. Similar to our first quarter, revenue in our Performance Analytics segment was down slightly year-over-year as we continue to transition from transportation analytics initiatives to position agriculture opportunities. We continue to make significant progress in building our precision agriculture pipeline as well as our deal flow as it improves, we expect our earned revenues in this area to start to make an impact. Non-GAAP operating expenses in the second quarter of 2016 increased to $8.4 million as compared to $6.4 million in the year ago quarter. The increase was primarily due to planned investments and head count, product development, and sales and marketing expenses in our Performance Analytics segment. Non-GAAP net loss in the second quarter was $356,000 or $0.01 per share as compared to non-GAAP net income of $588,000 or $0.02 per share in the prior year quarter. In regard to our year-to-date financial position, we followed up on our record revenues for fiscal year 2015, with record six month revenues for fiscal 2016 of $38.9 million, increase of 6.2% from our previous year period. Non-GAAP loss for the six months of fiscal 2016 was $0.01 per share as compared to non-GAAP net income of $0.02 per share for the previous year period and is considered to be again as expected due to investment and our Performance Analytics initiatives. Gross margin for the current year at 39.9% compares favorably to 38.5% last year as a good indicator of the quality of our record revenues. Non-GAAP operating expenses for the first half of fiscal year 2016 increased to $16.1 million compared to $12.9 million in the year ago period. Again the increase was primarily due to planned investments and head count, product development, sales and marketing expenses in our Performance Analytics segment. Non-GAAP net loss for the first half of fiscal 2016 was $302,000 or $0.01 per share loss as compared to net income of $802,000 or $0.02 per share in fiscal 2015. A healthy indicator of our transportation businesses backlog, total backlog at the end of fiscal Q2 increased to $46.2 million an increase of 13% year-over-year. Cash and cash equivalents at September 30, 2015, was $19.1 million, up from our June 30 balance of $18.9 million and compares to $22.0 million at March 31, 2015. Cash produced by operating activities during fiscal Q2 was approximately $500,000 which is a partial offset to our $2 million use of cash in Q1 that was essentially accounts payable timing related. Capital expenditures were approximately $162,000 during fiscal Q2 and we continue to carry no debt. Regarding our stock repurchase program, we repurchased 255,000 shares in fiscal Q2 at a settlement amount of $460,000. At this time due to our improved share price and trading volume, we are not repurchasing shares. In terms of housekeeping, we expect to file our 10-Q this week. And this concludes my prepared remarks on financials. Now I would like to turn the call back over to Joe.

Great, thank you, Andy. As those of you on the call may know I joined Iteris in September. Prior to this role, I managed category leading businesses in similar end markets, due to this prior experience that attracted me to Iteris. I believe the company is in a unique position to capitalize on significant trends in transportation namely intelligent transportation systems and connected vehicles and similar profound trends in agriculture, for example, the Internet of Things and Big Data. After almost two months at Iteris, I am even more excited about the opportunities in front of the company; our Roadway Sensors business unit is already a meaningful participant in an approximate $350 million global market for video and non-video detection sensors. With a combination of high performance products, and strong sales channels, we have had considerable success in the North American market. However, revenue has been largely limited to the North American market for video-based detection sensors and used for intersection detection, a single segment within the broader global sensor market. We believe this segment represents only an approximate 25% of the worldwide total addressable market. Therefore, we should have to grow through both penetration into adjacent technology segments and continued geographic expansion. Our Roadways Sensors product organization has a track record of successful product innovation. We plan to continue this strategy of innovation and expect to introduce significant new product capabilities over the next four quarters. We believe these new capabilities will enhance our position in the video detection segment and also increase our penetration in both established and non-established adjacent segments. Therefore, we expect to see a seasonally adjusted increase in the rate of customer adoption across our product suite. In FY '15 we restructured our Latin American distribution organization. Subsequently we enhanced our distribution network in the region, introduced a localized channel enablement program, and initiated a field marketing program in select Latin American countries. In H1 FY '16, we saw a solid increase in Latin American revenue, and our regional sales pipeline continues to expand at a healthy pace. Based on the initial success in this geography, we plan to continue our investment in Latin America, and anticipate this region to contribute meaningfully to the BU's overall sales growth. We believe our Latin America experience is portable to other international regions and we are actively evaluating opportunities to enter additional international markets. During the last decade, the market for transportation systems consulting has been constrained by the availability of state and federal contract dollars. Over the next three to five years, we expect public spending to remain modest and move in line with overall GDP growth. That said, we do anticipate a shift in spending toward intelligent transportation systems programs in general and connected vehicle programs in particular. Currently we're seeing an increase in demand for programs related to vehicle to infrastructure integration, actionable traveler information, data analytics, and enhanced safety and mobility, among other ITS initiatives. We believe Iteris is in a strong position to benefit from these spending priorities as demonstrated by the continuing growth in our backlog. Against the backdrop of sustained market demand, we will be more strategic about the new business we pursue. In general, we expect to target opportunities that one, include a meaningful software component; two, enable us to leverage existing platforms and other toolsets; and three, enhance our franchise as a provider of information based actionable insights in target geographies and target market categories. Over time, we believe this focus will enable the transportation systems segment to expand its margins and enhance its contribution to Iteris' enterprise valuation. As mentioned a moment ago, on November 5, we announced that San Francisco Bay area MTC awarded Iteris an $8.9 million contract to provide and operate a next generation 511 advanced traveler information system. Under the terms of the contract, Iteris will deliver real time traffic parking and transit information to across the Bay area. The MTC system will leverage Iteris' ATIS platform which is already deployed by nine statewide systems and four regional systems within California. This new contract is reflective of the type of business Iteris intends to pursue. As we communicated previously, Iteris has identified material opportunities to deploy the expertise of our Performance Analytics BU to the area of precision agriculture, in general and to the use of advanced centers and Big Data for agriculture in particular. We believe the total addressable market for precision agriculture in the U.S. alone represents a total addressable market of $1.5 billion to $2 billion. Outside the U.S. the precision agriculture market is considerably smaller but it's growing in nearly twice the U.S. rate. Our business objective is to create a predictable fast model, built upon an already large existing technology platform. To that end, we've utilized our global weather, soil, and water content, to develop proprietary land surface and agronomic models that are demonstrated to increase the productivity of various agro businesses worldwide. We recognize that over time the Internet of Things will significantly supplement the data sources currently available to make precision agriculture decisions. For this reason, our technology platform is already planned to enable customers to utilize IoT data sources including weather and soil monitoring stations, irrigation systems, and imaging platforms such as UAVs. Unlike most of the participants in the precision agriculture market, ClearAg is a completely global solution, the seed and crop protection companies, farming enterprises and other large agro businesses with whom we're now engaged address the global agriculture business. We believe that our ability to operate on a global basis provides Iteris a strong competitive advantage. From the outset, we have intended to support two distinct commercial models. Customers may license our API and platform components to integrate powerful analytics and digitalization algorithms into their own systems in order to enhance the efficacy of their analytics processes and to improve product performance in the field. Alternatively customers may license our applications to receive location specific field level information and science based advisories, associated with key agricultural production events, from planting to irrigation and attrition to harvest. As expected, our ClearAg API fields best to crop protection and crop nutrition companies as well as other large enterprises in the agro business sector, whereas our ClearAg Apps field best to independent growers, crop consultants, Ag retailers, and agronomist. Collectively ClearAg represents a broad and diverse range of agro business customers. In Q4 of FY '15 we launched our product suite branded as ClearAg version 1. Our initial market development and sales activities were targeted at season crop protection companies, allied providers, and large integrators. And already we have notable customers in each of these segments. These early adopters provide Iteris with valuable reference cases, exposure to over $50 million wholesale agriculture acres under management, and reaching to 10 different countries including the U.S., Canada, Mexico, France, and Argentina. Our ClearAg API sales pipeline continues to grow at a significant pace. Seasoned crop protection companies, allied providers, and integrators, represent the majority of our ClearAg API pipeline which includes both meaningful expansion opportunities with existing customers and large net new customer opportunities. We believe there is a significant additional revenue opportunity in these segments but will materialize over the next several quarters. In addition to the three initial target segments for our ClearAg API, we are receiving inbound increase from various prospects and other agro business segments, and currently we are involved in over 10 large scale customer evaluations. In addition to our focus on the ClearAg API, we remain committed to the market for ClearAg Apps. We plan to conduct an alpha test in fiscal Q3, and a beta test in fiscal Q4, with general availability of significant enhancements targeted to current FY '17. We utilize external resources that fits with the design and development of this plans new release. While the initial development cost for our next ClearAg Apps release are generally behind us, we do expect to increase our sales and marketing expenses associated for launch of our next ClearAg Apps release. Therefore to conclude, Iteris realized nice momentum across all business units in the first half of this year. We anticipate this momentum to carryforward albeit adjusted for historic seasonality. Q3 is a soft quarter for Iteris due to both weather and customer budget cycles. Therefore, as usual, we expect some negative sequential growth particularly against our prior record level quarter. We remain confident about the long-term opportunity for Iteris in the agriculture market and we plan to continue to invest in our ClearAg business. While we believe our ClearAg engineering capacity has reached sufficient run rate level to sustain our current near to medium-term requirements, we do expect to shift the investment mix towards sales and marketing activities, as we accelerate our market penetration. In other words, we expect our agriculture analytics initiative to continue to represent a net investment item on the P&L for several quarters as the line of business grows to its full potential. On a consolidated basis this will translate to modest operating losses in the second half. Now with that, I would be delighted to respond to your questions and comments. Operator?

Thank you, sir. [Operator Instructions]. And our first question will come from Jeff Van Sinderen with B. Riley. Please go ahead.

Good afternoon. Joe, since you bring a new perspective to ITI, may be you can just give us a little more color, may be summarize your initial impressions of what the Ag segment has, what it's lacking, and then your plan to accelerate traction and grow Ag?

Yes, Jeff, glad to. So just to -- just to catch this I've only been here a few weeks now, so tremendous amount to learn. But that being said, over a relatively short time here I have had an opportunity to meet with a number of existing as well as perspective customers and I've also spent a ton of time with our employees who are working on these products. And I have to say that I've really never been in organization where I've seen not just so much sincere interest in the product especially particularly new product that at this point really only been in market on a generally available basis for six months. The other thing that I'm seeing is that across the Board all of our customers see just real significant value creation opportunities for them. And it's just that's just true consistently across all the various segments in which we are selling and marketing the product today. So anyway, with all that said, I think that the challenge in front of Iteris is simply that we have so many opportunities and are going to have to pick and choose which ones are going to put our energy against most of our energy against in the short-term and then kind of step our way as we open up the App and sure and we expand into the larger marketplace. And so right now it's really kind of assessing those opportunities, quantifying those opportunities, and figuring out the best way to attack them.

Okay. That's helpful. And then I know you mentioned you started subscription revenues at this point. How should we think about the trajectory of growth in subscription going forward may be you can just give us a better sense of that. And then I know you're investing you spoke about sales and marketing expenses to ramp up new generation or next generation product. May be you can just talk a little bit about how we should think about the whole Performance Analytics segment and when you think you could get to positive operating income there, just wondering what you think needs to happen there and then what kind of timeframe is possible for that?

Sure Jeff this is Andy, I'll jump in first and let Joe kind of follow-on this one. As you know, we got the product out this summer and right now we have a different line of benchmarks and just obviously revenues they start very slowly. We've got it looks like over 10 key customers in evaluation stage with us which is kind of a key benchmark that we're looking at internally as far as the strength of our pipeline and that's our key right now is building that pipeline which Joe said we will be working on focusing on where we go first. As you heard from us before, we are focused on six figure type annual deals not the smaller deals that we're of years past. So we're focused on the very efficient, if you will, larger OEMs. When we go forward, as Joe had mentioned, we are going to invest, continue to invest in go-to-market activities such as the sales and marketing line, but you're going to see some shift this last period we had roughly $0.5 million worth of R&D which is not going to necessarily recur this particular period in terms of development where we're doing. So we will actually do some shifting from R&D spend to sales and marketing to actually vector in as you say on when do we get this thing cash flow positive and profitable. But right now it's additive process and when we look forward, we look at once we get these lines untapped how subscription revenue works, the earn revenue side of it starts very slowly and rebuild, but our goal is obviously to start showing a declining investment on the P&L and move our way in that direction over the next four plus quarters.

Okay. That's helpful and then on kind of shifting over to the legacy sensor and systems business, those are both growing, they grew nicely in the quarter, backlog is up. I know Q3 is kind of a seasonally slower quarter and you spoke to not seeing sequential growth there. But I'm just wondering I guess in Q3, do you expect to see year-over-year growth and then maybe you could also just touch on what level of revenue growth you feel is reasonable at this point to expect from both the sensor and the systems business that would be probably a good thing to get into?

Yes, this is Andy again; I'll just start on the financial side. As you are well aware, we do different down sequential quarter wise. But I think the key is year-over-year we expect to be up and so we will looking at three consecutive quarters of year-over-year growth and keep in mind we're growing over a record year last year. So you look at the multiple year momentum, things are going quite well. You will see on our Q, when it's posted we do give segment information. And when you look at Transportation Systems and the Roadway Sensors segments, not only are they growing at the top-line, but you look at the segment operating income that's also growing not only for three months, but for the six months, and again, I think we will post favorably from that perspective year-over-year in our Q3.

Okay, good to hear. Thanks very much and good luck for the rest of the quarter.

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

Great, thanks again, Tracy. We appreciate everyone's support and thoughtful questions and look forward to updating you again on our continued progress when we report our results for the third quarter in fiscal year 2016. So thank you very much and good bye.

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