OMNIQ Corp.
Q2 2021 Earnings Call Transcript

Published: 13 Aug 2021

[Operator:]

Good morning, and thank you for joining us for the Omnicorp Financial Results and Corporate Update Call for the Second Quarter ending June 30, 2021. Joining us today are Shai Lustgarten, CEO of OMNIQ, who will provide an operational overview; and Neev Nissenson, Chief Financial Officer, who will discuss financial results. . I will now take a brief moment to read the safe harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and our current expectations and our business as we see them today, they are not guarantees of future performance. These statements involve a number of risks and uncertainties and since those elements can change and in certain cases are not within our control, we would ask that you consider that and interpret them in that light. We urge you to review the company's Form 10-K and other SEC filings for a discussion of the principal risks and uncertainties that affect the company's business and performance and the factors that could cause actual results to differ materially. OMNIQ undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, unless required by law. I will now turn the call over to Shai Lustgarten. Please go ahead.

[Shai Lustgarten:]

Thank you, operator, and thanks to everyone joining us on the call today. I appreciate you taking the time for listening, and I hope you find you and your loved ones safe and healthy. Before we discuss quarter results, I would like to highlight last month's announcement that OMNIQ has closed on its 51% acquisition with an option to acquire additional 49% of Dangot Computers Ltd. With this acquisition, we're creating a $91 million revenue company on the 2020 pro forma basis that is providing AI and automation solutions, positioned to drive increased adoption of OMNIQ's AI-based offering. We expect to exceed the 2020 pro forma revenue figure here in 2021. In fact, I'd like to share two sets of results at this time, Dangot's alone and Dangot combined with OMNIQ or pro forma. Starting with Dangot's alone, Dangot's six-months ended June 30, 2021, results were six-month revenue of $19.5 million, six-month gross margin of 24%, six-month net income of $1.4 million and six-month adjusted EBITDA of $1.6 million. Turning to combined results pro forma, OMNIQ and Dangot combined six months ending June 30, 2021 results were six months revenue of $52.5 million, six months gross margin of 20%, six-month net loss of $4.8 million and six-month adjusted positive EBITDA of a little over breakeven of $31,000. The very strong combined financial results support OMNIQ's goal of uplisting to a major stock exchange. Additionally, Dangot opens up new markets for OMNIQ. For example, we recently announced that Aroma Espresso Bar, the largest coffee chain in Israel with branches in the U.S., Canada and other countries that has chosen Dangot to provide its self-service kiosks. According to a Forbes article, titled Self-Order Kiosks are finally having a moment in the fast food space driven by Alicia Kelso, it is predicted that the self-service kiosk market will reach $30.8 billion by 2024. Aroma is an Israeli Espresso and coffee chain with 200 branches around the country in the United States, Canada and in Europe. By the end of 2021, approximately 120 Dangot's self-ordering kiosks will be installed in Aroma Israeli branches, with the expectation to install 250 of the kiosks in total by the end of 2022. Dangot self-order kiosks are integrated with advanced computing as well as EMV smart payment systems. EMV developed and managed by American Express, Discover, JCB, Mastercard, UnionPay and Visa is a global standard for credit cards that uses computer chips to authenticate chip card transactions. The DORIX software house incorporates smart software at the kiosks that enhances the customer experience and enables fast ordering. Dangot's innovative product offerings continue to be adopted in its home market of Israel and are also a fit for OMNIQ's target markets. We look forward to leveraging Dangot's success globally and leveraging our strong sales team to penetrate the U.S. market and capture more and more of the anticipated $30 billion smart kiosk market. We're absolutely thrilled to possess these new capabilities and expand our total addressable market with the addition of Dangot, and of course, to be in what we believe is a strong position to up lease to a major national stock exchange. And now turning to OMNIQ's stand-alone successful first half and second quarter 2021 results. The first half revenue broken new records since new management took over in 2017 and reached close to $32.9 million, significant 24% year-over-year growth. As I mentioned, these excludes the Dangot's revenue, which will start getting consolidated this quarter, the third quarter. Q2 revenue reached, I'm sorry, Q2 revenue reached $13.1 million, which combined for $33 million for six months ending June 30, 2021, up 24% year-over-year. And AI-based revenue in Q2 2021 increased approximately 100% from Q1 2021. We also had increased our profitability margin to 25% in Q2. This is mainly attributed to our strategy, including our two main assets, our superior AI-based technology and a very strong and diversified customer base. Our 2021 momentum continues, but before I go further, let me now turn this over to Neev to take a deeper look at our financial results. Neev?

[Neev Nissenson:]

Yes. Hello, everybody. As Shai highlighted, we reported revenue of $13.1 million for the quarter ended June 30, 2021, which is an increase of 3.5% from $12.7 million in the second quarter of 2020. The revenue increase reflects for Q2 there's a higher demand for certain customers coming out of the COVID-19 pandemic as well as continued traction in our markets. Total operating expenses for the quarter were $5.1 million compared to $3.9 million in the second quarter of 2020. Net loss for the quarter was $2.5 million or a loss of $0.53 per share compared to a loss of $1.9 million or a loss of $0.49 per share for the second quarter of last year. Adjusted EBITDA, meaning adjusted earnings before interest, taxes, depreciation and amortization for the second quarter of 2021 amounted to a loss of $437,000 compared with an adjusted EBITDA loss of $551,000 in the second quarter of 2020. Cash balances was $5.4 million for the period ended June 30, 2021. I would like to classify that this balance includes proceeds from the capital raise we closed in July and our current cash position today are over $10 million after paying $5.6 million in cash to 51% of Dangot sales, which for that transaction, we also paid $2 million was retail. Let me now turn the call over back to Shai to talk more about the operational achievements and outlook. Shai?

[Shai Lustgarten:]

Thank you, Neev. As previously discussed, we remain focused on our basic objectives, creating long term shareholders' equity by strengthening our balance sheet and continue our growth. Q2 was another strong quarter, driven by our both complementary business lines, the AI products and the supply chain automation products. I will now provide an update on both parts of the business, starting with AI, I will share a few highlights. First, during the second quarter, we were selected for a Phase I software-as-a-service agreement with a multibillion-dollar top-ranked medical center to deploy our first cloud-hosted software for campus parking management. We also announced receipt of the contract at Philadelphia International Airport to deploy our AI-based EZ Edge VRS deployment cape, which automates and monitors entry and exits of vehicles at the TNC lanes. EZ Edge operates on edge-based processing using our deep learning convolutional neural network engine, along with our latest virtual technology. Additionally, we announced an order to deploy Q Shield, our AI-based machine vision solution at the headquarters of a foreign government defense department. OMNIQ systems superior performance is replacing an existing competitor's solution. We also received an order to deploy Q Shield at Port of Ashdod in Israel, the largest free port in Israel with annual cargo tonnage of more than 20 million tons. This order is part of a comprehensive plan by the state of Israel authorities to address maritime trade needs, increase ship size and strengthen Israel's economy. Turning to the supply chain automation business, I will share several highlights as well. OMNIQ continues to introduce new and in-house products and services to the market. Once that increased sales and continued affirming our strong market position, this can be demonstrated by the continuing growth of this business line year-over-year. We also continue our efforts in replacing the legacy technology used for object identification with our latest AI technology. As also announced, we received an approximately $1.1 million purchase agreement from a leading global specialty apparel retailer, which generates over $3 billion in annual revenue. The agreement called for mobile computerized IoT equipment as well as distribution center solutions to support their e-commerce initiatives and operations. OMNIQ's customer has more than 750 stores across the United States, Canada, Europe, Asia and the Middle East. Our suite of supply chain mobility solutions include advanced mobile technologies that are transforming the way businesses operate by automating the process and eliminating manual and paper-based processes that cause delays in operations and losses. Our solutions provide the tracking of all the IoT devices, managing applications and content, while we keep the devices and data safe and secure. The systems provides a more contactless approach to the customers' retail and logistics operations and will be integrated with the corporate automated services. Lastly, we announced the purchase order of a total of in value of approximately $1.5 million from a leading freight transportation and logistics company, which spans more than 40 million square feet of warehouse space across more than 150 locations with more than 10,000 employees. The purchase order is for rugged mobile computers, IoT devices to be used in distribution centers, operations, conducting automation of processes, digital monitoring and control and efficiencies through the supply chain levels. Those are only some of our AI and supply chain automation business highlights. Shifting gears, I just want to recap some highlights points of the Dangot transaction conducted lately. Consolidated OMNIQ and Dangot's pro forma revenue for fiscal 2020 amounts to approximately $91 million. Dangot brings a strong and impressive customer base, including hospitals, supermarkets, manufacturing plants, retail chains, restaurants, municipalities and government agencies. Dangot's influence with early adopter customer, including multiple AI pilots offer a very attractive opportunity to accelerate adoption of OMNIQ's proprietary AI solutions to automate the supply chain levels of our customers. And finally, OMNIQ's Fortune 500 customers provide a significant new market for Dangot's innovative solutions focused, among others, on the food and drug, medical, retail and the transportation and logistics markets. In closing, six months revenue reached $33 million, up 24% year-over-year, and AI-based revenue in Q2 2021 increased approximately 100% from Q1 2021. Based on pro forma 2021 half year results, the combined consolidated revenue of OMNIQ exceeds $52 million, representing an annual run rate of over $100 million. We're excited to reach the $100 million milestone and expect growth to continue. Operator, I will now turn over the call for questions.

[Operator:]

Our first question comes from Asha Kumar with Think Equity. Please state you question.

[Ashok Kumar:]

So back on this Dangot, the $35 million last year, you're at $38 million annualized run rate this year. So Shai, you talked about leveraging the sales team to address the U.S. opportunity given historically and to date, Dangot's has been primarily in Israel and less so in Europe. So in terms of contribution from the U.S. market Shai, do you think it's going to be second half of this year or more of a '22 event?

[Shai Lustgarten:]

Well, first of all, we're going to see immediate cross-sales between the companies. To your question, Dangot's equipment in the U.S., but it's going to start first from our support level, that's the low-hanging fruit, and that's not a very significant growth that will happen this year from these cross sales, but definitely creates the infrastructure for a very significant one, which will probably gradually start this year and, of course, continue next year as well. Remember, the type of products that Dangot brings to the table and solutions are exactly the system-level that we are aiming for to provide to our existing customers here in the U.S. So we're moving up the food chain of cross-sales products to our existing customers that we already sell to them on the component level or subsystem level many times and now adding additional products to the portfolio will, of course, get us more significant revenue growth. And again, back to your question, I think it will be a gradual performance starting this year.

[Ashok Kumar:]

And Shai, on the synergies, you had indicated on the expense side, you see about $1 million to $2.5 million that you can make on both sides because of the merger and significantly grow the EBITDA. So where do you see - what would be the time line for that? And what do you see normalized EBITDA, fully consolidated companies.

[Shai Lustgarten:]

So we started that process, of course. And again, like everything else, it is a gradual process, and I think that beginning of '22 - 2022, beginning of next year, we will, of course, see the more significant of it. That's my expectation, the team, of course, is working to do that quicker.

[Ashok Kumar:]

Okay. And any update on legacy business, Shai?

[Shai Lustgarten:]

Yes. The legacy business, as I mentioned, is growing year-over-year, and that is not only because we do better with our existing customers on our existing offering, but also because we are bringing to the table additional in-house solutions that we haven't done before and are able to expand more services and sell more to our existing customers, optimize sales to our existing customers. That is a focus of ours, and that is something that creates as demonstrated year-over-year growth with our legacy or automated supply chain solutions.

[Ashok Kumar:]

One last question, Shai, is on the backlog, right, you had about $25 million in the last quarter, right? And how does it compare? And any thoughts on what the pipeline looks like to support your second half momentum? And congratulations.

[Shai Lustgarten:]

Thank you again, Ashok, for the questions and your interest. The backlog continues to grow.

[Operator:]

Our next question comes from . Please go ahead with your question.

[Unidentified Analyst:]

I have a question about Dangot. Do you plan to increase the ownership in the company?

[Shai Lustgarten:]

Absolutely. Yes. We are - of course, that's on the agreement, the acquisition agreements, that is something that is stated. There is a due date for that, but we expect to exceed that due date and events moving forward to do it even quicker because, again, the results are exceeding the expectations and plans and of course, we'd would like to take the best possible soonest opportunity to enjoy that. So we are planning to do that quicker than the due date.

[Unidentified Analyst:]

Great. I must say, living in Israel - products or ever. Okay. And within your press releases and I understand that there is a break through with your AI technology for campuses and security, do you believe this trend will continue?

[Shai Lustgarten:]

Yes. We're indeed seeing good dynamics, good, I would say, recap to the pace we were used to before and even more. Backlog is actually increasing even higher than we've ever seen. So we are definitely seeing the growth in the AI demand and backlog accordingly and sales this year are expected to increase. This dynamic will continue.

[Operator:]

Our next question comes from Howard Halpern with Taglich Brothers. Please state your question.

[Howard Halpern:]

Congratulations on the quarter, guys. Could you give a little bit of an update, I guess, on some of the previous AI deployments like down in Georgia, in particular, and I think there was a test going on in New York, too, with ATLV. Could you give a little bit of a status on those projects?

[Shai Lustgarten:]

Absolutely. So first of all, regarding Georgia, the Georgia actually is a very nice project, Georgia State University, where we were, for the first time, moving up the food chain with our Perks software, CRM software that does campus management on all aspects, parking, enforcements, permits that communicate user interfaces with students, faculty members and visitors. We have visitor management app, et cetera, et cetera. And of course, security. But definitely, we - before we were - and like I said, it's a great example because that's exactly the direction of the company, before we were either providing the infrastructure, the image processing or machine vision infrastructure that allows the data to get digitized in real-time and brought up to the software level to come to the form of applications to do everything I just said. But we provided the infrastructure and also with Perks, we have certain cases, universities that we came with our software Perks, the CRM, we came in provided from the top level, the management that captures that data. Now for the first time, we are able to do the whole solution. We moved up the food chain end-to-end, and we're providing the infrastructure, the real-time data input infrastructure through AI and then bringing it up to the software level, the CRM level, where the analytics are getting done and provide the different applications through Perks, our CRM. And I got to say that that demonstrates the fact that we are the only company in the U.S. that has that capability of an end-to-end solution of both infrastructure, analytics and application. And regarding the second portion of your question, the ATLV. We are piloting right now with one of the largest municipalities, our product, which is the high occupancy vehicle enforcement. And that pilot is going on for a while. We are competing with some others. I can say that so far, we're doing very well. And we're very excited to get from the municipality. We're very eager to - we're just now waiting for the announcement to move up to the next level, and that will certainly will, of course, make that project successful, but actually had already proven to us that we can now go out and attract more municipalities at this stage because we are ready and the performance shows on tens of thousands of events a year - I'm sorry, a day where we detect the passenger count in the vehicle and also differentiate between what is the human, what is not in a vehicle. So that is something that excites us. It's next-gen solution and I don't know a lot of companies that can do this.

[Howard Halpern:]

Okay. That sounds great. And with the growth in OMNIQ's AI and the combination of the acquisition that you just made. In a year from now, with over $100 million in annual revenue, what kind of gross margin do you hope that you'll be able to achieve somewhere in the mid-30s, is that going to be a steady number you think you can reach?

[Shai Lustgarten:]

The answer is yes, but we're shooting for higher. We're shooting of course, for the higher 30s, and then the next step would be the higher 40s. As we right now, that's the toughest point, right? The integration of these high-margin products, AI products into the different markets that we captured and work with. So we got the market, we got the technology, and we're starting to sell. It comes first in forms of pilots, which, in some cases, we've already turned into regular weekly, monthly order intake on steady pace, which shows growth. And other aspects or other customers, sometimes these pilots go still going on like the ATLV one, but definitely are getting to the point where we are already are in the stage of introducing these products to the customers because of the good performance. So that's the hardest step, right, to the introduction and penetration. But definitely, we see the demand definitely the fact that quarter-over-quarter, we see 100% growth that shows that we're moving to the right direction. And definitely, as you can see, we've already shown a nice increase in margin in Q2, which will continue. And as we advance forward in that pace, we'll definitely be able to even breach the 40s quicker than we thought.

[Howard Halpern:]

Okay. And just one last one. From your conversations with the different exchanges, do you - you're fairly confident that before the end of the year, you'll be uplisted to a major exchange?

[Shai Lustgarten:]

So we've shared our plans and our objective to get uplisted and be on a higher exchange. We also have shared the fact that we meet the criteria. I don't want to say because it's out of my control, our control of exactly when that will happen. I would like to say that we are in a very good position.

[Operator:]

Our next question comes from Mitch Swergold with Swergold Advisory. Please go ahead with your question.

[Mitch Swergold:]

My questions have been answered, but I do want to really congratulate you on executing and getting so much done in such a short period of time and also on the really impressive vision that you have, really, really great job.

[Shai Lustgarten:]

Thank you, sir. Appreciate your support.

[Operator:]

Thank you. And ladies and gentlemen, that's all the questions we have for today. I'll now turn it back to Shai Lustgarten for closing remarks. Thank you.

[Shai Lustgarten:]

Thank you, operator. And in closing, I would first would like to take this opportunity to thank the OMNIQ team for continuing in performing well. We do have still a lot of objectives. We do have still a lot of things to do. We're getting things done, but we're definitely in the right, of course, trend into getting our objectives done. This year is going to be an exciting year. It's already is, but it feels like we just started it. All of us here in OMNIQ are very excited about what's happening and also about the future, and we're just trying to do things quicker, to get things done quicker. I'd like also to take this opportunity and thank our investors, and we're all looking forward to speaking with you soon in our next call. Thank you very much, everyone.

[Operator:]

Thank you. That concludes today's call. All parties disconnect. Have a good day.