Question-and-Answer Session
I would now like to address some of the comments and questions we have recently received from [unintelligible] about the second quarter and the outlook ahead. The first question states, “It appears that OTI has too many employees to support its current level of revenues. What are the company’s plans for employee staffing in order to control costs, yet maintain the workforce to enable revenue growth?”
Thank you for the question. The divestiture of Parx France and SmartID will reduce our headcount by approximately 33 employees and consultants, as well as reduce the costs associated with these operations. We are fully aware of the need to turn profitable as soon as practical and we are working in parallel to increase our sales and reduce costs.
Next question: “With the recent divestitures, how much cash is on the books and what are the plans for it?” Good question. As Shay mentioned, the $9.7 million in cash and cash equivalents and short term investments at the end of Q2 does not reflect the anticipated proceeds from the divestiture of our SmartID division that were initiated after the quarter’s end. Once the transaction closes, we expect to add an additional $10 million in cash to our balance sheet while eliminating the overhead from the SmartID operations.
Additionally, we also expect to receive up to an additional $12.5 million over time based on certain milestones and the future performance of the divested SmartID operations. We will also receive 25% of Parx France’s future profits on an EBITDA basis.
When the SmartID transaction closes, we will have a clear picture of our cash balance, which we plan to provide at that time.
In July, we also signed termination and supplement agreements with former OTI executives Ofer Bashan and Ohad Bashan. From the funds that were deposited in an escrow account for the employee benefits in 2012, OTI was returned $435,000 from this escrow account. From an accounting perspective, we expect to report other income of approximately $4 million in the third quarter of 2013.
Altogether, we plan to use our strengthened balance sheet to support organic and nonorganic growth in the fast-growing mobile cashless payment solutions market.
Next question is, “What is the company’s marketing strategy to produce future revenue growth?” Well, we see an immediate and growing need for our NFC and contactless readers. This demand is expected to accelerate over the next few years when more countries adopt NFC as an alternative to extensive and less-secure cash-based payment systems.
We also see growing demand for our Copni line of products to support NFC payments and [PKI] security methods. This strong demand, coupled with our fast-growing vehicle fueling and parking solutions, will help drive growth and ultimately profitability.
The next question is, “Do you expect to make any changes in the company’s poison pill defense?” Well, it is up to the board of directors and shareholders to define OTI’s shareholder rights plan and the management will surely execute their decisions. We will report any changes in our shareholder rights plan if and when [due].
Another question: “With pending legislation in the U.S. concerning so-called patent trolls, is OTI concerned as it divests various units? Is it possible to convey to the Street various rulings in the patent case?” Again, thanks for the question.
OTI is a practicing entity, not a patent troll or patent assertion entity. There is an important distinction. OTI is actively defending its IP that is based on more than 20 years of extensive investment by our shareholders. We will continue to take an aggressive stance against any company that may fringe on our intellectual property rights and we will continue to update you on the progress of our IP litigation status.
Another IP question: “What is the full impact of winning the case against T-Mobile?” Well, we don’t think we can answer this question at this time, because the damages phase of our litigation is still pending.
Next question: “Are there any other platform carriers currently infringing on OTI’s NFC patents?” We believe OTI’s NFC patents are being infringed upon, which is why we retained Global IP Law Group to lead our new intellectual property monetization campaign. We are working closely with them to develop and execute on a comprehensive IP monetization strategy.
Another question: “What is the estimated total addressable market for NFC and OTI’s share of it?” Well, industry analysts expect that more than half of all the handsets will have NFC functionality by 2015. And according to marketsandmarkets.com, NFC-enabled applications are expected to grow at a 35% compounded annual growth rate from $7.7 billion in 2011 to $34.5 billion by 2016.
Additionally, according to a Juniper Research report from November 2012, mobile payments, ticketing, and active control are the fastest-growing NFC segment with the mobile payment market expected to surpass $1.3 trillion in 2017. Juniper also found that Visa contactless payment has quadrupled over the last year and now generates approximately 30 million transactions a month.
No doubt that these trends are paving the way toward a cashless, paperless world, and we at OTI are already a major player in the NFC payment [unintelligible] and expect to play an important role in all other NFC payment [unintelligible] as one of the most experienced players in the market today.
The next question: “Are there any competitors or alternatives to OTI NFC technology? Who are they and what are their market penetrations?” Well, yes, there is competition. We’re not going to play alone in this huge, multibillion dollar market. In some cases we are competing against larger companies, such as [Jamalfo] and [GMZ].
However, as a pioneer in the NFC field with deep technical knowledge of the contactless market, OTI has a good competitive advantage over our competition. In fact, we continue to receive feedback from customers that they get better and more reliable products from us than from our competition. This is due to our deep knowledge of the technology and our long [unintelligible] proven experience.
Another question: “When can we expect the company to be cash flow positive and profitable?” The new management team is frankly building a detailed execution plan according to the board directives, with the goal of achieving sustainable profitability soon.
Next question: “What is the likelihood of small contracts similar to the Polish deal? What kind of marketing efforts are needed?” Well, our team in Poland is currently working on more deals, and we will report any additional deals as soon as they become relevant.
And the final question we received, “Please give more color on the revenue streams from Mastercard and Visa.” Well, Mastercard and Visa are not direct sources of revenues for OTI. They are the industry leaders responsible for certifying payments like the one developed by OTI.
All of our payment products are certified by Mastercard and Visa as a precondition for use by OTI’s customers. It should be noted that these certifications are very costly, which sets the bar high for entry of new, smaller competitors or technologies.
Thank you very much for your insightful questions. In summary, I would like to emphasize three key points. First, we continue to make strong progress executing on our new strategic plan, focused on our core business of providing contactless transactions and NFC solutions and monetizing related IP.
Secondly, we continue to effectively manage costs and further optimize our expense structure. These initiatives have allowed us to decrease our operating cash flow and expect further improvements in the second half of this year. Our newly optimized operational structure will allow us to better leverage our core competencies and ultimately drive long term growth and sustainable profitability.
And finally, our expectations for 2013 remain high as we build on the operational and financial momentum we have established in the first half of the year. We are confident that this steady increase in traction will produce meaningful results.
As global demand for the new NFC-based technologies continues to build, we are well-positioned for industry leading solutions and the growing customer base. We believe these key factors and strong tailwind will help us expand our market share and further penetrate our [unintelligible] segment.
Thank you for your time today. We look forward to speaking with you next quarter. Operator, please provide the appropriate closing remarks.
Operator
Thank you. Before we conclude, I would like to provide the company’s Safe Harbor statement with the following caution regarding forward looking statements made on this call, as follows.
To conclude, I must state that today’s call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Whenever we use such words as believe, expect, anticipate, intend, plan, estimate, or similar expressions, we are making forward-looking statements.
Because such statements deal with future events and are based on OTI’s current expectations, they are subject to certain risks and uncertainties and actual performance or achievements of OTI could differ materially from those described in or implied by these statements on this call.
For example, forward-looking statements include statements regarding our goals, beliefs, future growth, improvements, strategies, objectives, products and new product releases, bringing new sales executives, plans, revenue targets, profitability, potential opportunities, including opportunities in emerging and other markets, IP strategy, and potential success of such strategy, expansions, gaining repeat business, and shorter sales cycles, pipeline and new orders, and new deals in the near future or current expectations.
Forward-looking statements could be impacted by the effects of protracted evaluation, validation periods in the U.S. and other markets for contactless payment cards, market acceptance of new and existing products, and our ability to execute production on orders, as well as other risks and uncertainties, including those discussed in the risk factors section and elsewhere in our annual report on Form 20-F for the year ended December 31, 2012 and in subsequent filings with the Securities and Exchange Commission.
Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Except as otherwise required by law, OTI disclaims any intention or obligation to update or revise any forward-looking statements, which speak only as of the date hereof, whether as a result of new information, future events or circumstances, or otherwise.
This call contains certain non-IFRS measurements namely adjusted EBITDA. Adjusted EBITDA represents earnings before interest tax, income tax, depreciation and amortization, and future eliminates the effect of share based compensation expense.
The company believes that adjusted EBITDA could be considered in evaluating the company’s operations, since they provided clear indication the company’s operating results. This measure should be considered in addition to the results prepared in accordance with U.S. GAAP and should not be not be considered a substitute for U.S. GAAP results. The non-GAAP measures included in this call have been reconciled for U.S. GAAP results and the tables in the press release issued at the end of last month.
Due to the changes in the composition of the company’s board of directors, including the election of eight new U.S. directors on December 30, 2012, the company will no longer qualify as a foreign private issuer as of June 30, 2013, and will be required to report as a domestic issuer starting on January 1, 2014.
[unintelligible] on May 31, 2012, executives as of January 1, 2012, the company adopted international financial reporting standards, IFRS, as published by the international accounting standards board. However, as a domestic issuer, the company will no longer be entitled to prepare financial results in accordance with IFRS.
Therefore, the company has decided to adopt U.S. GAAP and accordingly to prepare its financial statements for the fiscal year ended December 31, 2012 and thereafter in accordance with U.S. GAAP. It should be noted that the financial results for the first, second, and third quarter of 2012 that were previously published were prepared in accordance with IFRS. The financial results for the second quarter of 2013 that appear in the press release were prepared in accordance with U.S. GAAP.
Finally, I would like to remind everyone that a recording of today’s call will be available for replay via a link available on the investor relations section of the company’s website at www.otiglobal.com.
Thank you for joining us today for our presentation. |
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