On Track Innovations Ltd. (OTIV)

[midastouch017]

OTI: New Board, New Management = Success

Jan. 22, 2014 5:41 PM ET | 6 comments | About: OTIV
Disclosure: I am long OTIV. (More...)

OTI: A LEADER IN THE NFC AND CONTACTLESS PAYMENT MARKETS

OTI (NASDAQ: OTIV: $3.91) is a pioneer and leading developer of cutting-edge cashless payment solutions. For over two decades, the company provided enterprises worldwide with innovative technology, creating new business models, growing revenues, streamlining processes, and creating measurable value for their end users.

OTI's proven suite of cashless payment solutions is based on an extensive IP portfolio boasting 24 patent families and over 100 patents and patent applications worldwide. Since 1990, the company has deployed hundreds of solutions for banking, mobile network operators, vending, mass transit, petroleum and parking in 55 countries. OTI is a one stop shop for cashless payment solutions offering both readers and payment solutions. OTI products include OTI Readers, OTIPayment Insert, OTI WAVE, OTI WAVE PKI, and OTI Sticker. OTI Readers are NFC and contactless reader solutions for point-of-sale providers. OTI Payment Insert

OTI's Payment Insert is a bridge to contactless payment - enabling the addition of NFC, contactless payment, MIFARE and NFC capabilities to any existing handset. Completely SIM, operating system, and handset-agnostic, OTI's Payment Insert is a post-market accessory that can be rapidly and cost-effectively rolled out with no technical overhead or special tooling. Payment Insert supports contactless payment for MasterCard, Visa and other card associations, debit and credit, e-Purse, mass transit ticketing, e-coupons and loyalty programs.

OTI WAVE

OTI WAVE adds NFC, contactless payment and MIFARE capabilities to existing iPhone and Android mobile devices. Completely SIM, operating system and handset-agnostic, WAVE offers banks and mobile network operators a cost-effective, post-market mobile payment add-on option. With WAVE, mobile network stakeholders can roll out new services and create new revenue opportunities, all with minimal investment and implementation overhead. WAVE's contactless interface supports contactless payment for MasterCard, Visa and other card associations, debit and credit, e-Purse, mass transit ticketing, e-coupons, loyalty program and healthcare applications.

OTI WAVE PKI

Organizations are implementing Public Key Infrastructure (PKI) solutions to authenticate consumers fighting fraud. The majority of PKI endpoint devices support personal computers, but do not provide a solution for mobile devices, which have become increasingly prevalent in PKI transactions. OTI's WAVE PKI is a device-agnostic add-on easily attached to the audio jacks of smartphones, tablets and PCs, allowing a solution for mobile devices.

OTI Sticker

The OTI Sticker is an entirely self-contained, contactless sticker containing a module with an embedded microprocessor chip and attached antenna. The Sticker includes a special adhesive, making it easy to attach to any surface of any device including phones, tablets and more. This special feature allows manufacturers to add contactless capabilities to their device even after completing the product, which saves both time and money.

Market Opportunity

Near Field Communication (NFC) is a form of contactless communication between devices like smartphones or tablets with more than half of all handsets will have NFC functionality by 2015. According to marketsandmarkets.com, NFC-enabled applications are expected to grow at a 35% CAGR from $7.7 billion in 2011 to $34.5 billion by 2016 driven by increased penetration of NFC-equipped smartphones with only 5% of the total mobile phones NFC-enabled in 2011 increasing to 46% in 2016. This growth is confirmed by Berg Insight, who saw global sales of NFC-equipped smartphones grow 300% last year to reach 140 million units and estimates shipments of NFC-equipped smartphones will grow at an annual rate of nearly 50% reaching a billion units by 2017. Samsung (OTC:SSNLF) is the primary driver of NFC adoption with Apple (AAPL) yet to provide an NFC enabled solution. When Apple does these figures could increase substantially. Mobile payments, ticketing and access control is the fastest growing NFC segments, with Juniper Research estimating the mobile payment market will surpass $1.3 trillion in 2017. There is a significant market opportunity for OTI to take advantage of. Visa and Mastercard have already backed OTI's payment solutions.

Another market presenting a tremendous growth opportunity for OTI is the $50 billion unattended machine market. There are more than 30 million food and drink vending machines worldwide, with a vast majority lacking cashless transaction capabilities. This is in addition to the increasing number of ticket machines, parking meters, supermarket self-checkouts, laundromats, photo kiosks, internet access terminals, bike kiosks and other locations that involve unattended cashless transactions. There is a huge benefit for operators adopting cashless payment systems as such cashless payments can increase sales by 20% or more since it does not limit the purchase to the cash in a customer's pocket.

New Management & Board

OTI has a new management team and board of directors in 2013 focused executing on a strategic plan focused on the company's core business of providing contactless transaction and NFC solutions, and monetizing related IP. Management reduced unnecessary costs and divested non-core, B2C operations: SmartID was sold in August 2013 as it was in a highly competitive and commoditized business that focused on system integration. OTI received up to $22.5 million in cash and potential payments for the sale. They are aggressive with their IP monetization strategy, leading to a favorable Markman ruling in the T-Mobile (TMUS) case, strengthening OTI's prospects for monetization. With new management, OTI is well positioned for growth.

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In addition to the strength of management, OTI has a strong board. Jerry Ivy joined in December 2013. Mr. Ivy has over 30 years' experience as a private investor and venture capitalist. He has purchased 3 million shares in the company. Along with Mr. Ivy's share purchases, board members have purchased an additional 258,548 shares of in the open market since the company last reported insider transactions in a press release on November 19, 2013. These purchases were pursuant to Rule 10b5-1 plans executed in June 2013 and/or during open trading windows pursuant to OTI's insider trading policy. OTI was advised these purchases total approximately 1,243,700 shares to date. The strength of the board is illustrated below.

Valuation

Besides the strength of OTI's product markets, the company has a very strong patent portfolio with over 100 patents covering a wide range of products and applications. OTI recently won a Markman hearing against T-Mobile, opening the door for a potential settlement and damages. A Seeking Alpha contributor wrote a great article on the event, which we urge you to read. The potential damages are unknown but a settlement will be a catalyst and could be larger than the company's current market cap of $127 million.

Beyond the strength of the company's products and the potential settlement, the company has a net cash of $11.66 million after the sale of SmartID. This could increase by $12.5 million based on the performance of SmartID. The company has a patent portfolio of 100+ patents including leading technologies in markets with a potential of $100 billion growing at over 30% per year, improving operations and insiders buying a substantial amount of shares. Given the recent divestiture of SmartID, annualizing Q3 revenues leads to annual revenue per share of $0.79. Using a conservative 30% growth rate, slightly lower than the NFC market growth rate, by the end of 2014 OTI''s revenue per share should reach $1.03. Using an EV/Sales multiple of 8 or $8 by the end of 2014 leading to oti doubling. Q3 2013 EBITDA reached $3 million up from -$2.2 million in Q2 2012. Assuming operating leverage EBITDA could double over the next year leading to end of 2014 annualized EBITDA of $24 million or 0.71 per share. Placing 12x EV/EBITDA multiple leads to a target price of $8.52 per share.

Technical Analysis by Harry Boxer (TheTechTrader.com)

OTI experienced a key technical breakout in Mid-November with a strong price/volume surge through $2, which we believe has triggered a new and important up trend. After consolidating for 6-7 weeks through early this month, OTI popped and broke out again last Wednesday with a dramatic pick up in volume. We would use pullback retrace moves to accumulate positions with projected targets of $5.90-$6.00 & $8.00-8.25 in mind with near term support around $3.65 & $3.25.


Conclusion

OTI is a leader in the contactless payment market with leading technologies and products within the NFC market. It has a strong new management and board, who are buying shares at a rapid pace. With the market growing at 35% per and operations continuing to improve, OTI's share price could double in the next year.

Additional disclosure: I was assisted in writing this article by my associate Marc Melendez.


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