On Track Innovations' (OTIV) CEO Shlomi Cohen on Q1 2017 Results - Earnings Call Transcript
May 10, 2017 3:10 PM ET| About: On Track Innovations Ltd (OTIV)
Q1: 05-08-17 Earnings Summary
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EPS of $-0.02 misses by $-0.01 | Revenue of $4.02M (- 12.0% Y/Y) misses by $-1.06M
On Track Innovations Ltd. (NASDAQ:OTIV)
Q1 2017 Earnings Conference Call
May 10, 2017 09:00 ET
Executives
Shlomi Cohen - CEO
Yishay Curelaru - CFO
Tamir Ben-Yoseph - General Counsel
Analysts
Brian Kinstlinger - Maxim Group
Josh Elving - Lake Street Capital
Mike Vermut - Newland Capital
Mike Latimore - Northland Capital
Edward Schwartz - Schwartz Investments
Kevin Dede - Rodman
Operator
Good morning, and welcome to OTI's First Quarter 2017 Conference Call. My name is Andrew, and I'll 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 presentations by Shlomi and Yishay, we will open the call to questions.
Please be advised that certain information discussed on this conference call will contain forward-looking statements. They can be identified by the use of terms such as may, will, expect, believe, intent, plan and other comparable terms. For example, forward-looking statements include statements regarding our expected adjusted EBITDA, momentum and growth for 2017, our expectations regarding future product launches and growth into new markets, our expected deliveries in 2017 and our expectations regarding our pipeline and opportunities.
While forward-looking statements reflect good faith, belief and best judgment based upon current information, they are not guarantees of future performance. They are subject to known and unknown uncertainties and risk factors, including those detailed from time to time in the company's periodic reports and registration statements filed with the SEC. OTI assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. The full Safe Harbor Provisions are set forth in the earnings release we issued this morning.
Today's presentation also includes various non-GAAP financial measures, the disclosures related to these non-GAAP measures including reconciliations to the most directly comparable GAAP financial measures are included in the company's earnings press release, which appears in the Investor Relations section of its website. I would like to remind everyone that this call will be recorded, and will be made available for replay via a link available in the Investor Relations section of the company's website at www.otiglobal.com.
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, and thank you for joining us today to discuss our results for the first quarter ended March 31, 2017.
We started 2017 with very positive momentum, implementing the sales strategy we set up at the end of last year. OTI is has established itself in believing one-stop shop cashless solution provider in our targeted geographic and vertical business market. We are well-positioned for growth focused on higher margin products and services and with recurring revenue.
Our revenues in the first quarter was slightly more than $4 million. This reflects our efforts to reduce lower profitability accounts and later fee inefficient activities. This shift has resulted in a very favorable metrics quarter-over-quarter including a gross margin increase to 55%, up 2% increase in the recurring revenues and 3% decrease in operating expenses in the first quarter. We believe that we present positive adjusted EBITDA for the year in 2017.
I strongly believe we will continue to see sales growth in the upcoming quarters and our 2017 targets will be met as planned. Before I discuss our other achievements during the first quarter of 2017, I would like to turn the call over to Yishay for his detailed report on our financial results. Yishay?
Yishay Curelaru
Thank you, Shlomi, and good morning, everyone. Before the market opened today, we issued the results of our first quarter ended March 31, 2017 in the press release. A copy of the release is available in the Investor Relations section of our website. Our total revenues for the first quarter were slightly more than $4 million. This result was primarily due to lower sales of readers in the United States and to a decreasing petroleum products sale in South America, which was partially offset by a 52% increase in sales to the European market of readers and otimetry solution.
Breaking down our Q1 revenues by source and their percentage of total revenue: retail and mass transit ticketing revenues was $2.7 million or 68%. Petroleum revenues were $800,000 U.S. or 20% and MediSmart and access control product revenues were $460,000 or 12%.
Looking at Q1 revenues by geographic region and the portion of each region contribution total revenue: America has accounted for $700,000 or 17%. U.S. accounted for $2.2 million or 55%. Africa accounted for $8,000 [ph] or 20% and APAC accounted for $330,000 or 8%. Our gross margin in the first quarter increased 4% or 55% of revenues compared to 51% of revenues in Q1 '16, an increase of 12% compared to last quarter. The increase in gross margin was mainly attributed to sales of higher margin product and services.
For the first quarter, operating expenses decreased 3% to $2.9 million from $3 million in the same-year ago period. We are continuing to evaluate opportunities to further optimize our expense structure and enhance operational efficiencies. Our cash used continued operation activities in Q1 '17 decreased by 43% to $700,000 U.S. compared to $1.2 million in the same-year ago period.
Our net loss from continued operation for the first quarter total $782,000 or $0.02 per share, similar to the last of continued operation in Q1 '16. We use adjusted EBITDA from continued operation and non-GAAP metrics as we believe it provides a clear indication of our operating results. In the first quarter of '17, our adjusted EBITDA loss improved to $309,000 from a loss of $340,000 in the first quarter of '16. The improvement was achieved despite the decrease in revenues by merely due to increasing gross margin and a reduction in our operating expenses. Please visit [ph] today's earnings release for further details about this non-GAAP metrics including reconciliation of adjusted EBITDA to our comparable GAAP results.
This complete my financial summary. For a more detailed analysis of our financial result, please reference our quarterly report on Form 10-Q which we plan to file by May 15.
I would now like to turn the call back to Shlomi for additional comments of our operational progress during the first quarter of '17. Shlomi?
Shlomi Cohen
Thank you, Yishay. Our business strategy is focused on building higher margin sales and the recurring revenue driven by our unique ability to deliver best in market NFC-based cashless payment solutions. In the first quarter, we saw acceleration and recurring revenues based on our ability to be a one-stop shop to our partners. We increased that ability and installations of our connected system in different geographic market and vertical is the leading cashless solution provider with our cutting edge technology and solutions. This was evidenced in part during the first quarter when we received the 2017 AI Business Excellence Award for the Best Cashless Payment Solution Provider.
The markets in our five-growth area metrics include what we believe are the three highest growth geographic area: Japan, Europe and North America; and two highest growth market vertical kiosk in ATMs. Our significant focus in North America includes a strategy of spending and strengthening our relations and activities with our existing partner, as well as recruiting new partners for our vending and kiosk verticals.
As a result of our focus strategy efforts, we met our first quarter business development targets, building a foundation for long-term growth. This quarter, we extended and diversified our customer base especially in the U.S., Australia, and Europe, a goal we have stated during our 2016 year-end conference call.
In the U.S., this included the growing sales and building partnership. OTI received multiple purchase order through our various U.S. channel partners during the first six weeks of 2017 to supply thousands of advanced self-checkout payment system, which incorporate our cashless payment system to leading U.S. based kiosk and food chain operators. We expect the system to be shipped throughout 2017.
Following the end of the first quarter, in April, we participated in the Nama One [ph] Show in Las Vegas, an important trade show for the vending and food service market. In conjunction with the show, we announced a partnering with U.S. based 365 retail market to supply cashless payment solution for Mico market - a growing trend in unattended self-service food service typically located in offices.
In a separate partnership, we are teamed up with Apriva to bring the new end-to-end EMV solution to market supporting unattended payments. The solution will immediately support Magnetic swipe payments cards, and we soon also support chip cards. In conjunction with Apriva OTI will provide secure EMV payments and telemetry solutions to out of vending solutions, a U.S based provider will flag [ph] out-of-vending machines for selling bulky items such as firewood.
In Europe we signed [indiscernible] as an exclusive distributer in the United Kingdom, to offer our three major cashless payment solutions. We believe this will generate opportunities for us in the near term. As the U.K is Europe's second largest vending market, with over 500,000 machines generating over €2 billion per year. 75% of market remains untapped and represents opportunity for OTI.
In Japan we received our first confirmed purchase order of FeliCa certified contactless advanced payment systems from a well-known Japanese retailer. This based on the Letter of Intent to purchase 10,000 systems over a period of three years. Having reviewed our activities and our geographic markets, the U.S, Europe and Japan, I would like to move on now to some key accomplishments in our fueling technology verticals.
We were pleased to announce on April 3, that our OTI Petrosmart subsidiary was successful in securing a significant purchase order from a major multinational oil company for the deployment of our EasyFuelPlus Automatic Vehicle Identification solution at 300 Gas Service Stations in Southern Africa. Because of the value our EasyFuelPlus delivers to our customers enables us to structure a pricing model that includes recurring revenue per gallon of fuel to OTI.
More recently, we announced a global supply agreement with Dover Fueling Solution, one of the world's leading providers of advanced fuel-dispensing equipment. Dover will distribute our EasyFuelPlus in 130 countries including an exclusive launch in the North American market later this year.
North America represents 25% of the 270 million corporate vehicles compromising the commercial fueling markets. This is a significant opportunity for us and we are very pleased to walk with a global leader in the space.
Before we open the call for questions, I would like to emphasize that we strongly believe we will continue to see sales growth in the out coming quarters and our 2017 targets will be met as planned.
We are now ready to open the call for your questions, operator please provide the appropriate instructions.
Question-and-Answer Session
Operator
[Operator Instructions] our first question comes from the line of Brian Kinstlinger with Maxim Group, your line is now open.
Brian Kinstlinger
Great, thanks, hi Shlomi. What if you give us more details on the Dover contract, how many gas stations for example are using this solution worldwide Dover solution? When will begin getting retrofit and how long do you expect it is going to take to complete that implementation.
Shlomi Cohen
Good morning, Brian. And basically the relations that we are having with Dover, it is not from today or yesterday, we are having those relations for the last few years, and the experience we are having with them is quite impressive and significant, and that the reason which the major milestone that we announced beginning of last month. Without getting into details regarding the potential, I think that you are familiar with the - with the market, we are sticking about major activities all over U.S via the OTW subsidiary that they are having in the east coast.
I think that later this year we will be able to give more details regarding these activities, and I think that the visibility that the market will have regarding this opportunity will be a significant one.
Brian Kinstlinger
Did the Dover customers need to act in to the upgrade or are they all going to be getting the upgrade or retrofit.
Shlomi Cohen
I'm not sure about the question because this is a technical issue, but basically we can do either the retrofit or install a new system in the existing gas station, we don't need - it is not something that we are not doing in other places.
Brian Kinstlinger
I understand, my question is; does a gas station need to [indiscernible] say yes we want it or are all Dover customers going to get it as part of their maintenance agreement for example.
Shlomi Cohen
It is a good question but I'm not sure that I'm able to answer it because I'm not familiar with the business model that they are running in this market.
Brian Kinstlinger
Okay and finally, is there any upfront cost in the installation process for OTIV.
Shlomi Cohen
I'm not sure that I understand the question.
Brian Kinstlinger
Meaning do you guys have any installation cost, services cost that are being paid for or up fronted by your company to get the system installed.
Shlomi Cohen
No.
Brian Kinstlinger
Okay, great, thanks so much.
Shlomi Cohen
Thank you.
Operator
Our next question comes from the line of Josh Elving with Lake Street Capital, your line is now open.
Josh Elving
Hi, good morning, Shlomi. So a couple questions just try to get my head around the revenue. I think there's been a lot of discussion about whether or not there is going to some bumpiness as these transition to more of a recurring revenue model, and try to focus onto your higher margin revenues perhaps letting some of your margin revenue go. I know that you have - had some challenges with a large customer of yours a in recent month, I was wondering if you could perhaps may be talk a little bit about the relative performance in the first quarter as it relates to potential loss of revenue from that customer. Did that play a significant role.
And then perhaps, try to find a way to offer some kind of color on what we can expect over the balance of the year for a revenue perspective.
Shlomi Cohen
Okay. Basically regarding this concept you are referring to during Q1, it was not part of our planning in any case, so the result of Q1 is not reflecting by the way the - this specific econ, this is one thing. The second thing by the way the activities that we are doing in 2016 I am eager to say also in the end of this year is actually reflecting in our results, and this is according to our plans. And I think that one of the most important thing that I can say about the results of Q1, is the fact that we are leaving a quite a lot of few accounts; the fact that we moved from selling a product to solution, also changed the game. And the fact that we increase the gross margin it is a reflection of those activities.
We also conceive that the recurring revenue that we are generating because of this new strategy is also reflecting in the result of Q1. And as I mentioned before, I think that we will see acceleration in our top line in the coming quarters, and this is part of the change. Sometimes the changes a little bit slower than expected but I think all-in-all those are also reflecting a little plan in our strategy so far.
And I have to say that I am quite positive with our results for Q1 and also about the results that we are going to achieve during 2017.
Josh Elving
So I think clearly you have shown your ability to improve the margin and have done a great job of reducing the use of cash, so I think you should be committed for that. I think the concern is what is kind of the baseline revenue that the company is generating, is the first quarter represent a low water mark, assuming zero revenue from this large customer. And a baseline for growing over successive quarters throughout the balance of this year. Knowing for sure you don't have a crystal ball, you don't know what's going to happen with this large customer but if we assume zero revenue from that large customer, is this the base line going forward for which we should see growth.
Shlomi Cohen
Look it's too early to say about this specific account, I don't know but in any case by the way and following the NAMA that we also met together over there, I think that I wanted to give you that visibility and the fact that we approaching new accounts directly in the U.S market. And this is a significant change for us. The feedback that we got during the NAMA event were really outstanding. And I think that the results of this change, will be reflected in the coming quarters, not only in the bottom line but also in the top line. And this is something will be implemented during this year, not next year, this year, and this is something that again I am saying the entire market will see.
Josh Elving
This growth is talking about over the balance of the year, what are going to be the main drivers for that growth.
Shlomi Cohen
Very important dimension. Even with the challenge that we are facing with this specific account that was part of our plan when we were actually generating the plans for 2017, we will meet our target for 2017.
Josh Elving
And what is that target.
Shlomi Cohen
We are not giving guidance as you know.
Josh Elving
An internal target, an internal revenue target.
Shlomi Cohen
Both.
Josh Elving
Okay. And where is the growth going to come from most likely, obviously you had the big announcement for your first Contract in Japan I think there is some hope some expectation that there's going to be more orders out of Japan. Sounds like things just take longer in that market but I think there's a lot of expectation of additional orders in the near term, can you kind of offer any color on opportunities in Japan and Europe for that matter.
Shlomi Cohen
Yes, I mentioned people the metrics and the fact that we - we are speaking about the three highest growth geographically that we are having in Japan, Europe and North America. By the way Europe it already reflected in our results of this quarter, and regarding the verticals we solely believe that from Kiosk and ATM [ph], we will continue to see a significant growth for OTI, and this metrics of the three geographic areas, and the two verticals actually representing the change, not only because we are generating a new accounts, but also from the fact that we change our sales strategy and we are generating a recurring revenue.
And this is by the way significant, regarding Japan we are walking intensively with billing system, our strategic partner in Japan and needless to say that this account that we are having is not going to be the last one, we continue to pursue after a new accounts and I believe that we will be able to resent positive results in the Japanese market.
Josh Elving
Can you tell us about on timing though, I mean obviously we all expect your continued to work on those relationships but when might we see additional orders out of Japan.
Shlomi Cohen
I cannot comment on that again, but because it is quite difficult to be accurate in the Japanese market regarding the time table, because over there the time it is having another meaning compared to other places, so I am trying to be careful regarding that, if you remember in the past you were asking me many times when we are going to see the first order of Japan, I don't think it is a question of if, it is a question of when; second timely [ph].
Josh Elving
Okay. I guess my last question just kind of go back to the first question. As we look at the model here, if we drop down to say $4 million like we did in the first quarter. Do you anticipate growth from other businesses being able to replace that shortfall in revenue by the end of the year on a run rate basis.
Shlomi Cohen
Look we are walking intensively in a very positive approach, so I don't think that we thinking in such way I don't think by the way that we will be having the fall in Q1, again we're, you know, we're not giving guidance and from the other end this result is actually reflecting our strategy to change things in the company to step out from a non-profitable account and also from inefficient activity.
So basically everything at the moment is according to our plan.
Josh Elving
Thank you.
Operator
And our next question comes from the line of Mike Vermut with Newland Capital, your line is now open.
Mike Vermut
Did a great job on the margin side here, and I guess calling that relatively low margin business that we had. On that front where can - as revenues begin to ramp and lot of these relationships that the bear fruit, where should we margin heading, can you keep your SG&A around where it is and do0 margins increase slightly, or you know, over the next year, two years where can we see this headed.
Yishay Curelaru
Hi Mike, this is Yishay speaking. In terms of our operating expenses, as we said in our calls, we do expect it to stay in that volume of around $3 million at quarter. Now as for the gross margin we are doing our best we can to enhance this gross margin, given operational and on the price side with our new comps. So for that matter and I want to be careful with that, we are doing the best we can in order to maintain and increase it.
Mike Vermut
So if we manage our way back to that mid $5 million range we should be generating some nice EBITDA, some nice cash flow. A large portion of that would start to drop to the bottom line.
Shlomi Cohen
If you add the numbers then the answer is yes, if you look at the historical numbers, but again, we need to be careful here.
Mike Vermut
Okay, then as we don't have your internal plans, may say you're hitting those - you have announced significant supply agreement, whether it's on the PetroSmart, whether it is on Readers [ph], with Apriva, cross vertical, cross geographies. How much of that has begun to hit and how begins to hit in second, third, fourth quarter, because I know there's a ramp up phase. And just trying to gauge your confidence that we start to rebound on the revenue side, and how quickly that begins to happen. It is tough for us to model this without having a - there's been so many announcement in the - in the past quarter, and they are significant announcements for OTI, but it's very difficult for us to gauge when they start to filter in to our revenue.
Shlomi Cohen
Look, Mike I think that you - the market we are seeing acceleration regarding our top line, this is something that maybe not always meeting the expectation of the market, but we are working in order to accelerating the top line and this is something that eventually is going to take place. Don't ask me about the timing but it is - I am not speaking about the next year, this is something we are working on that, and I think that the market will accelerate quite soon.
Mike Vermut
Okay and then, when we're looking at the Kiosk market, and we see this; it's exploding everywhere, right, whether you to go Panera [ph], McDonald, Windey's, it's all over - we got to Wawa [ph] 7/11, they're everywhere. Explain to me the competitive landscape out there. Whom you are going up against. What we have - and a lot in this have nothing, right, haven't even begun the rollout and you looked into a Starbucks they have nothing, you have McDonald is just beginning. So we are at the early phases of this, where do you think we fit in the competitive landscape and where does that put us out to win.
Shlomi Cohen
We are actually working today with one the biggest - if not the biggest Kiosk provider in the U.S market, and this is 365 as I mentioned before. But we are not working only with Delaware [ph] we are working also with others in this market. And I have to say that each one of them given so much advantage regarding the verticals that there actually touching, which is in the fast food, or it is in the coffee industry or any other verticals that they are rating inside of food industry, I think is what OTI is presenting or what OTI is actually delivering to those kiosk provider - it's a unique solution, and I am emphasizing that fact that it is actually solution and not for the fact that we are giving them not only different readers that we are having but also the Telemetry unit, and on top of it we are adding a software package that actually manage everything in the most efficient way.
So following that as again I am saying is reflected in our result of Q1 and mainly the gross margin, the fact that we are actually giving solutions that generated recurring revenue. And this is something that is significant for us and that is by the way that the change is going to be not only in bottom line but also will be in the top line.
The market is actually booming in the kiosk industry, and I think that the OTI is significant part of this change in the U.S market.
Mike Vermut
Excellent, okay. Great job so far, it is going to exciting to watch it over the next year.
Shlomi Cohen
Thank you.
Operator
And our next question comes from the line of Mike Latimore with Northland Capital, your line is now open.
Mike Latimore
Thanks. Yes, just on the revenue review for the year, so one, you are not giving revenue guidance, I guess I just want to clarify that. And - but if you are I mean do you see revenue growing this year.
Shlomi Cohen
Look, quarter-over-quarter we will - I believe that we will as I mentioned before we are positive, and I think that we will be going into this direction of acceleration. And I am saying again that I think year-over-year the company will present growth in the top line and I'm sure also in the bottom line, and I think by the way as I mentioned in the end of 2016 and also beginning of this year that we are going to see positive adjusted EBITDA in year 2017.
Mike Latimore
Okay, so you do expect revenue to grow in 2017 year-over-year.
Shlomi Cohen
Sure.
Mike Latimore
And then In terms of the license transaction revenue, I think that is some of the recurring revenue will start to show up, I guess that revenue line been relatively stable albeit down a little bit year-over-year, last few quarter, when should we start seeing that licensing transaction revenue starts to improve, I have seen that that's where a lot of fruits this year recurring solution sale start show up.
Shlomi Cohen
Yes, I think that you can see it already in Q1. This is part of the change, if you are looking at Q1 2016 versus Q1 2017 there is a big change by the way in this respect, and part of our strategy is to increase part of the recurring revenue. And the idea is to make the recurring revenue significant part of our top line.
Mike Latimore
And some of the - when you are selling units to your customers, what percent of the Readers you are selling, for what percent of your kind of your individual units sale includes sort of the full solution as a part of just a reader at this point, almost a 100% kind of full solution now, or is it - I am just trying to get a sense of the attachment rate for your kind of - Telemetry recurring service [ph].
Shlomi Cohen
This is a very important question, look when we are looking to Australia, I have to say that 100% of our sales today is solutions, meaning there is a bundle of FeliCa, Telemetry unit of the software package. In Europe it is almost, I am guessing because I didn't dig in but it should be high percentage, something between 75% to 80% and even maybe more than that, it is solution. Again, as we are selling in Australia.
In U.S by the way, in 2016 it was zero, and today because we stepped into the kiosk market, it's accelerating and I have to say that almost the entire solution or the entire sales that we are adding for the kiosk market is actually based on solution. We are not selling reader into a reader.
Mike Latimore
Thanks. And just last one. You talked, I think it was a big restaurant chain was growing out with your products. Could you just give an update on that? Is that sort of a rough estimate of how much volume you might see there this year?
Shlomi Cohen
Thank you for this question. This is one of our most successful events that we are having since beginning of the year. I don't know how it's going to be developed and how many systems we are going to sell, but we are focused in something significant with this account. It also depend on the marketing strategy of this account and we are not exposed to the entire details of this strategy. But I think that if you are looking on the entire market, you can see that most of the fast food chain are implementing today more and more kiosk. This is expanding, by the way also to other places that not only fast food, but also where coffee chain and so on. OTI want to be part of it and we are doing a huge amount of effort in order to take on our significant market share.
Mike Latimore
Great. Thank you.
Shlomi Cohen
You're welcome.
Operator
And our next question comes from the line of [indiscernible] with Horizon Networks. Your line is now open.
Unidentified Analyst
Yes. Good morning, Shlomi. Can you comment on...
Shlomi Cohen
Good morning.
Unidentified Analyst
Good morning. Can you comment on what the status is for the losses we have - have been…
Shlomi Cohen
Maybe, Tamir can say a few words about it.
Tamir Ben-Yoseph
Hi, this is Tamir. The litigation is obviously pending, so it's not something that we can comment on. We do continue to believe that this matter can be resolved outside the confines of the courtroom.
Unidentified Analyst
Do you expect this to be resolved soon?
Tamir Ben-Yoseph
I can't comment on that.
Unidentified Analyst
Okay. Thank you.
Shlomi Cohen
You're welcome.
Operator
[Operator Instructions] Our next question comes from the line of Edward Schwartz with Schwartz Investments. Your line is now open.
Edward Schwartz
Good morning, Shlomi.
Shlomi Cohen
Good morning.
Edward Schwartz
If I heard correctly, you say that we would have positive EBITDA for the year 2017. Is that correct?
Shlomi Cohen
That's correct.
Edward Schwartz
Okay. That's guidance, no? Okay. If you're giving guidance to what positive EBITDA would be, what would be your breakeven run? Shlomi, you can't help. If you give guidance, give guidance. I'm not trying to be confrontational, but it just doesn't make sense to give guidance in one area and not allow questions to follow through which would be logical - what would be your breakeven run rate?
Shlomi Cohen
Ed, yes, basically we are giving expectations. We are not going into details and we are giving accurate focus. The reasonable decision that we are not giving guidance, we are going to respect it, but we are doing our best to increase the visibility of the market towards OTI and at this point of time, I think that we are doing our best in order to share with you our expectations. And we will keep it like that.
Edward Schwartz
Okay. There's bump in the road that happened with revenue in the first quarter. If you didn't have this sort disagreement with a major customer, would the revenue been more in-line? Or would you still have the bump in the road?
Shlomi Cohen
Absolutely not. As I mentioned before, it was not part of our Q1 plan.
Edward Schwartz
Okay. I think that's it. Hopefully we'll have a good rest of the year.
Shlomi Cohen
Thank you, Ed.
Operator
[Operator Instructions] Our next question comes from the line of Kevin Dede with Rodman. Your line is now open.
Kevin Dede
Thanks. Good morning. Good morning, Shlomi, good morning Yishay. Listen, I can tell that given the number of questions you've had on this that it's slightly contentious. But just to reiterate, you're expecting positive EBITDA, you're thinking that gross margins could be stable at 55 if not improved and you're expecting your operating expenses to stay in that $3 million range. Is that fair based on what I've heard so far this morning?
Yishay Curelaru
Regarding the positive EBITDA, you're correct. Now regarding the gross margin, as you know, it's a mix of customer and it's a mix of sales. Okay? Now, saying that 55, we can maintain, it can increase, it can go low or higher in the next quarter. Okay? This is not something that we can comment and we have to stay careful with it, but as I said, we're doing whatever it can to maintain this high gross margin.
Shlomi Cohen
I think that basically for the long run if we can step back a little bit and look on the future the fact is that we're actually increasing the recurring revenue model. We'll support relatively [indiscernible] high gross margin. The fact that we are doing it not only in the payment, but also in this fueling as I mentioned before is actually supporting this trend. But again, as Yishay mentioned, the fact that it's a mix of activities that we are having, it's a little bit difficult to say if we will keep it as is, it will grow up, or it will go a little bit down. But I think that for the long run, we can speak about acceleration.
Kevin Dede
Okay. Thanks, Shlomi. I think with that summary, I think people should feel a little bit better about what to expect. So, thank you for that.
Shlomi Cohen
I appreciate it. Thank you.
Kevin Dede
You mentioned the Apriva deal in U.S. Just wondering if you can speak a little bit more to that. Is that unit exclusively or is that one of your fields where you've got telemetry software bundled?
Shlomi Cohen
No. It's not exclusively, but we have according to our understanding, significant relations with them and needless to say, that's also viewing the event in Vegas. They actually presented our technology to their customers and I think that this is actually reflecting the fact that we are actually a significant partner for them in the kiosk market. I think by the way when you're looking on the type of solution that they are delivering to the market, the otiPulse, it start to be more and more significant in their portfolio.
Kevin Dede
Okay, fair enough. Now, you mentioned Australia was seeing 100% bundled solutions, Europe 75% to 80% and the U.S. is growing, but you didn't mention anything about Japan and I was wondering if you could just sort of fill us in on how you bundled solutions in there.
Shlomi Cohen
My mistake. It's a 100% solution by the way. Although there, it's a bundle. It's a bundle. The market, all I will say, the type of accounts over there are not consuming product. They are consuming solution. That's a huge advantage for OTI technology. I agree with you, I didn't mention Japan and Japan is 100% solution.
Kevin Dede
Okay. And then the new rule outs in the PetroSmart division. Are they fully bundled as well?
Shlomi Cohen
Yes, absolutely. Over there, it's a full package of technology with full system integration activity that we are doing and that's the reason, by the way that I mentioned the major account over there that is actually compensating us also per gallon as well. This is a significant change for us. That's the reason that following your previous question, if we will be able to keep this gross margin for the long run, I believe that the answer is positive.
Kevin Dede
Great. Clearly as bundled sales increase as a percentage of sales, that makes perfect sense. Thanks for digging into that a little bit more.
Shlomi Cohen
But not only that, Kevin. The fact that we are selling solution, it's giving us actually the ability to generate the recurring revenue because sometimes it can sell solution, but it's not always saying that you can generate recurring revenue.
Kevin Dede
Great, Shlomi. Great. Thank you. Okay, now I think it was Mike Latimore that asked a little bit about competitive background. I was wondering if maybe you could just dig into that a little bit. Who are you putting up against most in Japan and U.S. and Europe?
Shlomi Cohen
Okay. In order to answer that, I need to do all because if I'm taking you to the European market, the market over there is more fragmented and I will say that almost in every country, I'm having a different competitor. If I'm going to U.S., it's more flat and I may think a few major wave of competitors over there; and if I'm going to Japan, it's a local giant that we are actually competing with. If you want that we will dig into names, I will say the following. In the U.S. market, we can see ID Tech, we can see Crane, we can see CPI. Those guys are actually competing with us. In Europe, it's a long list. It's really long list of the very small competitors. In some cases I will not say that they are competitors because they are not able to present a full portfolio like OTI is actually presenting, but over there, I am saying again, it's a very fragmented market. And the fact that we are able to accelerate the sales over there in the last 12 months, it's a significant achievement. So far by the way, we are having more than 15 partners in the European region.
Kevin Dede
Okay. Thanks. Thanks very much, Shlomi. I appreciate the extra detail and congratulations on the increasing recurring revenue.
Shlomi Cohen
Thanks.
