On Track Innovations' (OTIV) CEO Shlomi Cohen on Q3 2016 Results - Earnings Call Transcript
Nov. 10, 2016 4:12 AM ET| About: On Track Innovations Ltd (OTIV)
Q3 2016 Earnings Summary
EPS of $0.01 beats by $0.04 | Revenue of $5.6M (+ 64.7% Y/Y) beats by $1.35M
On Track Innovations Ltd (NASDAQ:OTIV)
Executives
Shlomi Cohen - CEO
Yishay Curelaru - CFO
Tamir Ben-Yoseph - General Counsel
Analysts
Joshua Elving - Feltl
Mike Vermut - Newland Capital
Mike Latimore - Northland Capital Markets
Edward Schwartz - Schwartz Investments
Kurt King - Harvest Capital
Operator
Welcome to OTI Third Quarter 2016 Conference Call. My name is Brian and I will be your operator this morning.
Joining us today is the company's CEO, Shlomi Cohen; CFO, Yishay Curelaru; and General Counsel, Tamir Ben-Yoseph. Following the presentation by Shlomi and Yishay we will open the call to questions.
Now I would like to turn the call over to OTI's CEO, Shlomi Cohen. Shlomi please proceed.
Shlomi Cohen
Thank you, Good morning everyone. Thank you for joining us today to discuss our results for the first quarter of 2016. As you can see from the earnings release we issued this morning I'm very proud to present the fourth quarter in a row of improvement in all our major elements in our Q3 reports. Our financial results for the quarter were again strong across the board. We increased our revenues to 5.6 million compared to 4.8 million the previous quarter, we increased our cash position to 12.9 million up from 11.2 million the prior quarter and we maintaind our operational efficiency which helped us improve our gross margin.
We also continue to implement our strategy of focusing on core business by concluding the sale of our parking business. Our main airports focus on stable higher margins and sustainable growth for the coming years. Overall we’re pleased to report our guest profitable quarter from continuum operations. This demonstrate a continuing success of our efforts to bring OTI to a sustained profitability.
Before I discuss where we are in this important work I would like to turn the call over to Yishay for his detailed report on our quarterly financial results. Yishay, please.
Yishay Curelaru
Thank you, Shlomi. Good morning everyone. Before the market opened today we issued a press release with our results for the third quarter ended September 30, 2016. A copy of the release is available in the Investor Relation section of our website. As we reported in the first release our total revenues increased 10% to $5.6 million from prior quarter and increased 64% from Q3 last year. The revenues and other results reported today reflect the shifting of the results from our passing business to discontinued operations following the completion of the sale of this business.
Revenues for Q3 also include a onetime license fee resulting from litigation settlements. Working down our Q3 revenues by [indiscernible] the percentage of total revenues. Retail and mass transit ticketing revenues was $3.9 million or 59%. Petroleum revenue was $1.1 million or 19% and finally MediSmart and access control product revenues were $650,000 or 12%. Looking at Q3 revenues by geographical region and the portion of each regions contribution to total revenues.
North America accounted for $2.4 million or 43%. Europe accounted for $1.7 million or 30%, Africa accounted for $1.1 million or 19%, Asia accounted for $290,000 or 5% and South American accounted to $150,000 or 3%. Our gross profit for the third quarter of 2016 was up 24%, $3 million from prior quarter and up 64% from Q3 last year. On a percentage basis our gross margin was 54 as in Q3 last year, and an increase from 51% in the prior quarter.
Turning to expenses, operating expenses for the third quarter 2016 decreased 7% from the prior quarter to $2.8 million and decrease 32% from Q3 last year. Operating expenses for Q3 marked the lowest quarterly level for OTI in more than two years. Our net income from continued operation totaled $207,000 or $0.01 per share. This was a major improvement for net loss of continued operation of $2.4 million of $0.06 a share in the same year ago period.
Now to our non-GAAP results, for the third quarter of 2016 we are pleased to report an adjusted EBITDA profit of $730,000. This was a significant improvement from an adjusted EBITDA loss of $1.1 million in Q3 last year. Please refer today's earnings release for further details about this non-GAAP metric included reconciliation of adjusted EBITDA to our comparable GAAP results.
Turning to the balance sheet; at quarter-end we had cash and cash equivalents and short-term investment of $12.9 million which are up by 16% from the end of prior quarter. During the third quarter we completed the sale of our headquarter buildings resulting a reduction of $600,000 in our long term loans and a reduction of $1.8 million of [indiscernible]. This completes my financial summary. For more detail and analysis for financial results please refer to our Form 10Q which we plan to file by November 14.
I would now turn the call to Shlomi for his comments on operational progress and outlook. Shlomi?
Shlomi Cohen
As you’re all familiar we were able to maintain our positive momentum and are pleased to report a fourth consecutive quarter of improvements in our results. This achievement should not be taken for granted. The third quarter presented some challenges due to seasonality that exist in our business because of summer vacations and holiday is taking place in nearly every region of the globe.
OTI has put in a significant efforts to overcome this challenges and as a result we were able to again successfully meet quarterly top and bottom line targets. We believe that our teams dedication and hard work will allow us to maintain our positive momentum. Continues to improve our fundamentals and establish sustained profitability. Our achievement in the third quarter go beyond the numbers on CAGR [ph]. As we remind very busy on the commercial and operational front. Continuing to execute on our strategy to focus on our core technology and business we completed the sale of our parking business.
This sale allow us to step out of business activity which has no synergies, our other lines of business. This sale also advanced our efficiency program by reducing headcount related to this business, reducing operating expenses and freeing up cash previously tied to certain parking business guarantees. In Europe, we continued to execute on our sale and growth strategy and have seen continuing increase in the number of all the metrics systems deployed. With each metric system further in deployment generating both [indiscernible] fields and recover revenues. The most important are significant change that we created for the long run is the fact that we move from being a product company to a leading solution company in the standard payment market.
In the U.S. market we continue to expand our activities and believe that we will keep this policy movement on the promising key verticals. We are also pleased with the progress in our internet of things business. During the third quarter we have significant effort and made meaningful progress towards the development of payment being utilizing our pay [indiscernible] and demonstrated our ability to turn any product in fashion garment into our payment device. We expect to launch our payment product in the next few months.
Our PetroSmart division also continues to show growth with existing and new customers. The Petroleum segment continues to yield high gross margins and we continue to expect growth in this segment year-over-year.
We continued placing significant efforts on growth, marketing and product development in order to strength our fundamentals and core businesses in addition most importantly we continue to show results for these efforts. Our major efforts and focus over the last few months has been mainly on growth. We were investing efforts in marketing and sales with a new segment in our verticals exposing OTI to new potential markets and expanding existing opportunities within existing markets and verticals.
This strategy we continue to be the bread and butter of our activities for the coming years after we have stabilized and built long term infrastructure. As a result of our efforts during the last year and our intended continuation of these efforts we anticipate a stable long term adjusted EBITDA profitability in the beginning of 2017. This outstanding achievement is needed to build a solid business platform for our growth in the coming years. Actually if you’re analyzing our first nine months in 2016 we’re presenting actually -- we’re presenting an adjusted EBITDA profitability. This event will be an important event for us and this will validate the fact that all of our efforts during the last year and our new strategy has made us successful profitable and stable company with a clear variation of growth.
And with that we’re now ready to open the call for your questions. Operator please provide appropriate instructions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question will come from Joshua Elving with Feltl. Please proceed.
Joshua Elving
I wanted to ask a couple of questions, just about -- I don't know I mean I know you just kind of you're just in a process of turning the corner towards profitability a lot of uncertainty around IoT. A lot of opportunity in readers. Have you even started to kind of think about what longer term EBITDA margins for your business what they could look like as you ramp revenue aggressively over the next couple of years?
Shlomi Cohen
What we’re looking long term activities that we’re [indiscernible] and from where we’re actually generating ourselves definitely locations like Europe that although that we started with [indiscernible] and following that we’re actually generating recurring revenue and the same thing by the way goes for the Japanese market. We believe that for the long term we will continue to increase our gross margins.
Joshua Elving
So I guess I'm just trying to get a little bit of better sense. I mean you know you had better than a 10% adjusted EBITDA margin in the quarter and I just was trying to get a sense for obviously it's going to be a lot of moving pieces from quarter to quarter over the next several quarters but as the company gets into scale is there significant upside to that EBITDA margin?
Yishay Curelaru
If we forward into the future I believe as Shlomi just mentioned we will see an improvement in the adjusted EBITDA. How much improvement, how much will it be it's difficult to say at this point.
Joshua Elving
In talking about the opportunity in Japan you reference an order or a letter of intent with the Japanese retailer for a 10,000 reader, is that the same contract that was previously discussed that were likely to be delivered a couple of years or is that a new order?
Shlomi Cohen
No this is the same one and by the way, not 10,000 systems mean [Technical Difficulty] full system and the 10,000 systems are actually for the next few years. That’s correct.
Joshua Elving
And then just as far as other opportunities are concerned in Japan. What are your expectations or what should our expectations be? It would seem you have the potential with you perhaps a 100 or 1000 or more readers or potentially even systems annually for the next several years. Is that realistic and where are you with getting a processor lock down and how do we think about how this rolls out over the next couple of years?
Shlomi Cohen
Japan, it's a unique market. When you’re looking on the decision cycle in the Japanese market compared to the European and also to the U.S. one it's a little bit and this is understatement, it's a little bit slower than the other markets. Although the ability actually to generate the [indiscernible] cuts or to do some kind of [indiscernible] is a little bit challenging. Nevertheless we’re having a full confidence regarding this market and we have 100% confidence also with the partner that we’re having over the billing system. The other question if we are going to accelerate our business in Japan it's only a question of time. We’re not completing activities according to the needed regulation although -- and I'm expecting by the way that during 2017 we will see those again to tell you it's going to be in January or in March it's a little bit difficult but it's definitely aware that we’re going to generate these results in the Japanese market especially with the -- few months ago getting the Japanese payment certification.
Joshua Elving
Last question, how are things developing in Europe and can you give some kind of a sense for telemetry or kind of end to end solutions in place today in Europe.
Shlomi Cohen
Yes, as you know we’re not giving guidance to the number of system that we are deploying in the market but I can tell you that all in all we’re very pleased from the pace of implementing the system in Europe. I think that it's also reflecting in our reports and needless to mention that Q3 was very challenging for us but still eventually we were able to meet this target and even beyond it and partly related to our activities. All-in-all I think that we’re very satisfied from the results that we’re generating in this market and especially regarding the fact that we’re deploying more and more telemetric system in the market.
Joshua Elving
Okay. Would you say you have several hundred connections up and running in Europe? No guidance, just what's currently.
Shlomi Cohen
We’re very pleased with the results.
Operator
[Operator Instructions]. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Please proceed.
Mike Latimore
You’ve mentioned a onetime license fee I think in the quarter, what was the amount of that?
Shlomi Cohen
We can't disclose there is a license fee and it's pursuant to confidential settlement that’s included within that total.
Mike Latimore
So that flow through the kind of payments line, the reader license line? Within the 3.9 million I guess is the question?
Shlomi Cohen
None of the transaction item.
Mike Latimore
And then when you talk about stable and consistent EBITDA does that sort of imply relatively similar stable revenue levels?
Shlomi Cohen
Can you repeat the question Mike?
Mike Latimore
Yes, I think you talked a little bit about EBITDA being stable and consistent into the first half of '17, I believe does that sort of suggest similarly revenue would be stable consistent?
Shlomi Cohen
No. I just mentioned the fact that from now on we are doing all the efforts that is needed in order to present a stable EBITDA profitability and I didn’t refer anything to the revenue. This is something by the way that we’re going to finalize in the next coming weeks and later on we are going to present as well Board of Directors for approval for 2017. The comments regarding our revenue for '17.
Mike Latimore
Okay. So the basic comment that you are expecting to be EBITDA positive that’s the bottom line?
Shlomi Cohen
That’s our expectation.
Mike Latimore
And just to be clear. I know you’re referencing first half of '17, is that comment really of the fourth quarter of this year.
Shlomi Cohen
Nothing related to Q4 at the moment or to the end of this year. But again the idea is that during 2017 we represent EBITDA profitability for the entire year. Regarding Q4 look we’re doing a lot of efforts to continue the positive momentum that we’re referencing but not more than that.
Mike Latimore
And then you announced a large reader order during the sort of the September quarter, were many of those units shipped into the second quarter or is it pretty much all in the fourth and first quarter?
Shlomi Cohen
We’re going to deliver part of it, we’re going to deliver during Q4 and part of it a little bit later but it's not one part.
Mike Latimore
So there wasn’t -- was there any of that or was it shipped and recognized in the third quarter?
Shlomi Cohen
Yes, there was also some of it in third quarter.
Mike Latimore
And then on the telemetry opportunity, what is the roughly the average revenue per connection you’re seeing in some of your telemetry deployments?
Shlomi Cohen
I cannot comment on that, it's a guidance it's not -- I'm allowed to disclose it.
Operator
Our next question comes from the line of Edward Schwartz with Schwartz Investments. Please proceed.
Edward Schwartz
My question is a more of a follow-up on Josh's regarding Japan. I think he asked if there was a payment processor in place and I don’t think that product was responded to.
Shlomi Cohen
Regarding Japan?
Edward Schwartz
Yes.
Shlomi Cohen
I think that in general I would say the following. Part of our efforts and part of the fact that it's decision cycle by the way is relatively slow compared to other markets. It's related also to the fact that in order to recruit our payment versus on the Japanese market you need to follow a very detailed and very intensive regulations. All-in-all we’re in this process and we’re quite efforts to finalize this task as well. It's not a straight forward for something like in Europe like we were doing in Europe or at least what we know in states and it' takes time, it takes time because over the -- there is a heavy regulation related to the payment processor and the relation that both guides are having with the operators. All-in-all we’re in a very positive let's say moment over the and the idea is that we will completely start. To tell you exactly when I'm not able to say because I don’t know it but I think we’re reaching to a point that we’re not far away from this.
Edward Schwartz
And let's talk a little bit your recurring revenue model. Could you explain what that means, how you derive recurring revenue?
Shlomi Cohen
If you’re looking at the telemetry deployment that we’re having in the European market. On top of the fact that we’re giving our solution meaning reader plus [ph] machine to machine device and telemetry unit we are also giving service of payment processing. In order to get invested in this markets I took a decision in end of last year beginning of this year of fluctuate that we’re charging our partners, the vending operators. So all-in-all on top of the fact that they are paying for the system for the entire system we’re also getting a monthly payment that it's based on each machine but again it's [indiscernible] on a monthly basis. That’s basically the idea and we will keep this operation because all-in-all we’re generating a very positive results out of it and of course we have rendered -- spending it also to other operators as well.
Edward Schwartz
And that same model applies to Japan also?
Shlomi Cohen
Basically the answer is yes but at this point of time it's quite difficult to say because if it will be a percentage from each production or it will be a flat rate this is under question mark and we will have to decide it together with billing system, our other partners but the basic model will be almost the same.
Edward Schwartz
Okay. And then Japan, there are if I read some information on the internet, the government wants to have all the vending machines nearby the upgraded by the Olympics in 4 or 5 years is 40 years -- that we’re talking somewhere between 5 million and 6 million vending machines be upgraded, is that correct?
Shlomi Cohen
That’s correct. The idea is that before 2019 the entire spending network [indiscernible] will be cashless that’s correct, most of them are cashless the idea is that they run to open it to the -- today it's a closed loop, they want to make it open loop and they want to make sure that all the other credit cards worldwide will be relevant for those vending machine because today if you’re coming with your Visa or MasterCard or American Express and you’re trying to pay in one of those vending machine you will not be able to do this. With our technology, with the solution that we’re implementing the idea is to open those vending machines to the existing credit card systems.
Edward Schwartz
And as of today is there -- are there any other companies which require approval for these unattended vending machine readers?
Shlomi Cohen
Yes. I would say the following and I will be very careful with that. According to our best knowledge so far we are the first company outside of Japan that got the FeliCa certification but again I'm very careful about it and this is according to our best knowledge.
Edward Schwartz
So getting back to Josh's original question, as for your guidance do you think you will get a 100,000 readers a year? The market has four years to upgrade 6 million readers, I would think a 100,000 readers would be loss with the opportunity though.
Shlomi Cohen
We want to be around this number, that’s not a question.
Operator
Our next question comes from the line of Kurt King with Harvest Capital. Please proceed.
Kurt King
First just to clarify, you just commented with respect to Japan that the mandate there is that all vending machines be cashless before 2019, did I hear that correctly?
Shlomi Cohen
That’s correct.
Kurt King
So my math that means in two years this work needs to be done not four years, not five years as we have heard otherwise. Am I missing anything there?
Shlomi Cohen
There is a timeframe basically of three years that they want to complete. If it will be the entire 6 million it's a good question but I believe all the efforts that they are going to represent will be first of all in Tokyo, Osaka and major cities I will say but the idea at the end of the day to make those 6 million vending machines that are rendering cashless and open to the credit card that you offer, that’s the idea.
Kurt King
But not to put too finer point but my question is really about the timing because before 2019 by my understanding means by the end of 2018 which is relatively short term horizon?
Shlomi Cohen
Yes. That’s the timeframe, that’s the quantity. I don’t see if something will change we definitely will know about it, we’re partner in Japan but I don’t have more information.
Kurt King
Okay. And then we saw reports that in [indiscernible] in conjunction with Apple had gotten a FeliCa certification in Japan. Is there any overlap with what you’re doing there or is the market separate?
Shlomi Cohen
Totally separate. If you will begin into this as well [indiscernible] GENeco presented terminal for that attended market, not for the unattended market.
Kurt King
My last question is just regarding operating expenses, Shlomi since you’ve come on-board OpEx has trended down every single quarter. Are we at the bottom or is there still more to be cut even given that I think your expense base is now about a third lower than it was when you joined back in the third quarter of '15?
Shlomi Cohen
I would say that 99% of the entire cost cutting that was playing it's already done so I don’t think that from now on we should expect to a market change like that regarding the cost cuts.
Kurt King
Okay. And then can I assume that parking was not included in the expense number for the third quarter?
Shlomi Cohen
All of that parking segment actually was reclassified as discontinued operation.
Kurt King
And Yishay can you just give us a rough cut out on what the expense rate for parking? In other words how much of the sequential decrease in your expenses is just explained by -- well I guess you’ve already said though that your numbers [Technical Difficulty].
Shlomi Cohen
It's a non-material number.
Operator
[Operator Instructions]. We have follow-up questions from the line of Joshua Elving with Feltl. Please proceed.
Joshua Elving
I just followed up on that question from Kurt, regarding operating expense. So obviously the performance has been great. You’ve burned down quite a bit. Can you keep them at this level for the foreseeable future? Obviously I'm sure there is onetime items, the top up from quarter to quarter but how long or how big the business get with this rate of operating expense?
Shlomi Cohen
Look we’re now in a process to finalize in 2017 and beyond and the entire [Technical Difficulty] in the last few months and definitely now and we will continue it also in the future is growth, growth and again growth that’s the main idea. So after we actually stabilize the company and we will be doing some kind of cleaning and we’re investing heavily also in sales and marketing and needless to say what is our expectation but again the entire efforts from now on is actually related to growth and again after we finalize the process for '17 and beyond we’re going to present it to our Board and afterwards I don’t know if we’re going to give guidance or not, this is also related to our poor decision but I believe this will be some kind of idea, which direction we’re going to present.
Joshua Elving
Okay so in theory growth costs money, so fair to say this is kind of baseline and to the extent you’re successful with growth. You’re going to have some additional operating expense on a go forward basis, that’s really all right [ph]?
Shlomi Cohen
Give me until the end of the year I will finalize the entire investment and a road plan that want to present to my Board and afterwards we will be able to discuss it in more intelligent way.
Joshua Elving
And then one last question, with regard to the timing of revenue recognition. On a contract like the one you announced at the end of the third quarter related to the 65,000 readers to be delivered by the first quarter. Is it simply you recognize the revenue as the readers are shipped? So theoretically if you ship 10,000 in the third quarter, 30,000 in the December quarter and 25,000 in the March quarter you would recognize the revenue in the same mix?
Shlomi Cohen
Yes that’s correct. We recognize our revenue after we shift the readers.
