On Track Innovations Ltd.
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to OTI's Second Quarter 2021 Results Conference Call. . As a reminder, this conference is being recorded. You should have all now received by now the company's press release. If you have not received it, please contact OTI's Investor Relations team at GK Investor & Public Relations at 1-646-688-3559 or view it in the News section of the company's website, www.otiglobal.com. I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin, please?

[Kenny Green:]

Thank you, operator. Welcome to On Track Innovations Second Quarter 2021 Conference Call. I would like to also thank management for hosting this call. With us on the call today from OTI is Yehuda Holtzman, the company's CEO; and Assaf Cohen, the company's CFO. Yehuda will provide some of the recent key highlights and discuss the company's strategy, while Assaf will review OTI's financial performance for the second quarter of 2021. Please be advised that certain information discussed on this call will contain forward-looking statements. They can be identified by the use of terms such as may, will, expect, believe, intend, plan and other comparable terms. For example, and in addition to those forward-looking statements mentioned in the company's results press release from earlier today, OTI is using forward-looking statements when it discusses, among other things, OTI's strategy, the potential of new customers, growing business with existing customers and increased traction on opportunities, current trends or price increases, momentum, the potential impacts from COVID-19 virus pandemic, the impact of the global shortage of electronic parts, the impact from delays from suppliers, the shift to SaaS solutions and recurring revenues, traction in geographic regions, OTI's cash needs and satisfaction thereof, pipeline and ability to convert it to orders and expected backlogs, OTI's optimism for the midterm, expectations regarding its growth in sales sequentially and otherwise, recurring revenues and profitability and timing thereof and OTI's belief with respect to the midterm outlook for its cashless payments. 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 filings 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 provision are set forth in the press release we issued earlier today and which are available on OTI's website at investors.otiglobal.com. And with that, I would now like to hand the call over to the company's CEO, Yehuda Holtzman. Yehuda, please go ahead.

[Yehuda Holtzman:]

Thank you, Kenny. Welcome all, and thank you for joining us today. We are pleased with the overall progress we have made, and I believe that our strategy of global sales growth is paying off. While it will still take time, OTI is beginning to reap the rewards. There were a number of positive developments in our results during the quarter, which are very encouraging, and I would like to highlight them. Our revenue in the quarter was $2.9 million. This was slightly up from the prior quarter, but this does not tell the whole story. Among other matters, I'm pleased to share that we have also built a strong level of orders amounting to a few million dollars, which will be delivered in the coming quarters. As you have probably heard throughout the global economy, electronic parts supply is currently highly constrained and delivery times have been significantly delayed and extended. This has two main effects on us. First, it has caused a delay in the delivery of parts we need to manufacture and deliver all the recent orders we received. And secondly, scarcity has increased the cost of goods, which reduced our gross margin in the quarter. However, as I indicated earlier, we have a large number of orders in hand, which we expect to deliver in the upcoming quarters. At the same time, our pipeline has vastly improved, and we are becoming increasingly successful at converting these to orders. As I have discussed in the past, part of our strategy is to focus on global Software-as-a-Service or SaaS sales, which over the long term, will lead to sustainable and recurring revenue stream. In line with our goal, our SaaS sales in the quarter were $405,000 or 14% of revenues, which was up 42% year-over-year. As you know, switching from onetime lumpy revenue to an ongoing recurring revenue model requires us to make some short-term sacrifice of a larger initial lumpy sum of revenue for smaller but a more predictable long-term stream of regular recurring revenues. Therefore, we believe that the growing level of SaaS revenues is a long-term positive factor for our business. The other aspect of the result that is very -- that we see strong traction in orders across all our 3 geographic regions. We are winning -- growing roster of new customers and the initial orders for our products, and these wins are making us increasingly optimistic. To demonstrate, there is a solid demand for our products and technology. Furthermore, while initial orders always tend to be of a smaller scale as we enter and build a new relationship with the customer, all these new customers have the potential to grow to something much more significant for OTI over time. Overall, I believe that our momentum is gaining and that our strategy implementation is making progress. I do expect this to translate into continuously growing sales in the coming quarters, especially once the global supply constraints are resolved. In summary, I'm pleased where we are headed and I'm optimistic that 2021 is a year of recovery for OTI. And I'm excited for our prospects in 2022. Looking ahead, I expect to show sequential growth throughout 2021. While supply constraint for electronic parts is impacting our margin and delaying revenue recognition, we believe we will see the fruits of our efforts in the next few quarters. We are already seeing new customers and new orders as well as an increasing portion of SaaS revenues. I believe the outlook for our markets of unattended cashless payment is very solid. And our position at the forefront of this market means that we are well placed to take advantage of that. I would like to hand the call over to our CFO, Assaf Cohen, to provide the summary of our financial results. Assaf, please go ahead.

[Assaf Cohen:]

Thank you, Yehuda. As usual, I will be covering some non-GAAP metrics, including adjusted EBITDA from continued operations. We believe this provides a better understanding of our ongoing performance. Please see the earnings release on our website for further details about this non-GAAP metrics, including a reconciliation of adjusted EBITDA to our comparable GAAP results. As previously announced, we decided to sell our Polish subsidiary assets that included the mass transit ticketing segment, and the financial result of ASEC were included as discontinued operation and all the prior periods' information has been reclassified to conform with the current period's presentation. Our revenue in the second quarter amounted to $2.9 million compared to $4 million in the second quarter of last year, which was our peak before the impact of the coronavirus pandemic, which primarily impacted the second half of 2022 -- I'm sorry, second half of 2020. In terms of the breakdown from where revenues were derived in the second quarter of 2021, written revenues were $2.2 million or 76% of total revenue and recurring revenues were $0.7 million or 24% of total revenues. Looking at the geographic breakdown in the quarter, the Americas accounted for $0.8 million or 29% of revenues compared with $0.8 million last year or 20% of revenues. Europe was $1.2 million or 41% of revenues compared with $1.3 million last year or 33% of revenues. Africa was $0.5 million or 16% of revenue compared with $0.9 million last year or 6% of revenues. And APAC was $0.4 million or 14% revenues compared with $1.7 million last year or 41% of revenues. Software as a Service or SaaS revenues in the second quarter of the year was $0.4 million or 14% of revenue versus $0.3 million or 7% of revenue in the second quarter of last year. Gross margin in the second quarter was 34% compared to 42% reported in the second quarter of last year. As Yehuda mentioned, the lower level of gross margin in the quarter was mainly due to the global-wide shortage of electronic parts and their price increase. In the second quarter, operating expenses were $2.4 million. This is compared to $2.5 million in the second quarter of last year. Net loss from continuing operation was $1.5 million compared to a net loss of $0.9 million in the second quarter of last year. Net loss was $2.7 million or a loss of $0.04 per share compared to a net loss of $1.1 million or a loss of $0.02 per share in the second quarter of last year. Now turning to our non-GAAP results. Adjusted EBITDA loss from continuing operations was $1.3 million in the quarter compared to adjusted EBITDA loss of $0.7 million in the second quarter of last year. Looking at our balance sheet. As of June 30, 2021, the company had cash and cash equivalents and short-term investments of $2.6 million. During the second quarter, we successfully completed the rights offering of shares to our shareholders with total gross proceeds of $3.3 million. I would like to thank our shareholders for their continued support. And now we will respond to your questions which were sent in following which we will open the call for live Q&A. Kenny, please review the questions.

[A - Kenny Green:]

Okay. Thank you for that, Assaf. So we've received a number of questions ahead of this call, and I'd like to thank our investors for their continued interest in our business. So we will endeavor now to answer your questions. As some of you wish to remain anonymous, we'll not include names with the questions unless you specifically ask us to. So also, we've received a number of questions. Some of them have overlapped, so we've combined them where possible. So to start the questions. To what extent will the Delta variant and the raw material shortage prevent OTI from breaking even?

[Yehuda Holtzman:]

So it is hard to assess the connection between the two matters. Generally, the component shortage situation drives increase in component price, which had an impact on our Q2 gross margin. This impact will make it more challenging for us to meet our goal this year.

[Kenny Green:]

If financially tight again, will another capital increase be carried out or will you sell PetroSmart?

[Assaf Cohen:]

So at this time, we believe that we have sufficient capital resources to fund our operations for at least in the next 12 months.

[Kenny Green:]

What about new markets like the United Arab Emirates? Are there opportunities for OTI to generate sales in these new markets?

[Yehuda Holtzman:]

Yes. We are looking at different options to provide our solutions in various territories, including the UAE.

[Kenny Green:]

What is the revenue level expected to be to reach breakeven? And what is the expectation for revenue in the second half of the year?

[Assaf Cohen:]

We don't give the guidance on our internal projections in this respect.

[Kenny Green:]

Okay. So what are the sales of the TRIO-IQ right now and what are expectations of sales for the TRIO-IQ in the second half of the year?

[Yehuda Holtzman:]

So in general, the TRIO-IQ is going very well, and customers are providing strong positive feedback. We are forecasting continued growth in TRIO-IQ sales throughout the different ratings.

[Kenny Green:]

Okay. So with regard to the PetroSmart business, can you please provide more color on this business and what your expectations are for the contribution of PetroSmart over the next few quarters?

[Yehuda Holtzman:]

The PetroSmart business was negatively impacted by COVID. We do forecast recovery during the next few quarters, mainly due to its healthy backlog and SaaS pipeline as well as by the steady increase in its recurring revenue.

[Kenny Green:]

Okay. So our last question -- last write-in question is as follows

[Yehuda Holtzman:]

The supply shortage of components does impact OTI both on the COGS and on meeting product delivery targets. We are buying some of the component through third parties so to expedite components availability, which obviously negatively impacts our gross margins. I will add that in addition, during the last few months, the company has been purchasing long-lead components to be used for sales later this year and beyond.

[Kenny Green:]

Okay. Thank you for that. Thank you for that, Yehuda. So that will conclude the questions we received ahead of time, and we'll now open the call for the live question-and-answer session, if any questions remain. Operator, please open the call for the Q&A.

[Operator:]

. The first question is from .

[Unidentified Analyst:]

Yes. I want just to make sure, you said you're going to be profitable in the next -- I mean, the second half of this year. Do you still think it's going to happen? This is my first question.

[Yehuda Holtzman:]

So as I indicated before, the price increase of components is going to make this target that we set for ourselves is challenging. Obviously, we are doing our best to meet it, but it definitely makes it more challenging right now.

[Unidentified Analyst:]

Okay. So when do you expect you're going to be profitable if at all?

[Yehuda Holtzman:]

Well, our objective is to become profitable. And as for when, it's hard for us to determine at this stage. And we will update as we progress. Right now, we cannot forecast exactly when.

[Unidentified Analyst:]

Okay. Okay. That's fair enough. Now my second question out of three is -- did I understand well, you think you're going to have -- you have enough cash for the next 12 months?

[Yehuda Holtzman:]

Yes, that's correct.

[Unidentified Analyst:]

Okay. And the third question is, you're a company of cashless paying. And I mean everybody is using right now cashless paying, also with the phones, but -- a lot of people. And I'm like thinking to myself, don't you think that On Track has missed the train?

[Yehuda Holtzman:]

I think that just to remind ourselves, our market is focused on the unattended parts. And that segment is continuous -- continuing to grow, and we forecast that it will continue to grow. So from that perspective, we feel that we have a lot of room to grow. As for the usage of -- paying through applications, actually, that further increases the need for our product because the phone, especially with the Google Pay and Apple Pay, they actually simulate a credit card. But you need at the other side, you need also a device like ours. Again, when you make payment to in unattended situation in most cases and therefore, we see currently that those type of applications actually promote our products.

[Unidentified Analyst:]

But it's already news. So how can you -- I mean, it's not like you're inventing a need or something. So if you really think you can still conquer markets?

[Yehuda Holtzman:]

So again, the fact of the matter is that a number of customers are growing, and the number of business we're getting is growing. So we feel confident that yes, we will continue to grow.

[Operator:]

. There are no further questions at this time. Mr. Holtzman, would you like to make your concluding statement?

[Yehuda Holtzman:]

Sure. So on behalf of OTI, I would like to thank you for your continued trust and long-term support of our business. I would also like to especially thank those of you that submitted and asked questions on our call today to make it more interesting for all of us. We are looking forward to speaking with you again next quarter and updating you on our progress. Thank you, and have a good day.

[Operator:]

Thank you. This concludes OTI's Second Quarter 2021 Results Conference Call. Thank you for participation. You may go ahead and disconnect.