Shlomi Cohen - CEO Yishay Curelaru - CFO Tamir Ben-Yoseph - General Counsel

Joshua Elving - Feltl Edward Schwartz - Schwartz Investments Kurt King - Harvest Capital

Thank you and good morning everyone. Thank you for joining us today to discuss our results for the first quarter of 2016.

Our performance in the quarter we began to build a financial and operational benefits of the key strategic initiatives we implemented in the second half of last year. These measures were designed to optimize our internal processes and manufacture end practice, as well as reduce cost and accelerate growth.

Our execution of strategy in the first quarter was demonstrated by the improvement of two important financial metrics; gross margin and operating expenses. In fact, our total operating expenses of $3.3 million in the first quarter marked the lowest level in over two years.

The significant decrease in our operating expenses coupled with improvement in our gross margin allowed us to achieve another company milestone, the last quarterly adjusted EBITDA loss in two years. Importantly, this accomplishments were the direct result of our strategic efficiency program.

Some of the key actions we took included outsourcing all of manufacturing processes reducing personal in non-strategic areas by nearly 20% as well as lowering employee salaries at our headquarters by 10% across the Board. With a major face of the efficiency program now complete, I am confident to say that OTI is a leaner, more flexible, and more capable organization today than ever before.

This characteristic have positioned us to better execute on our operational objectives. Along that line, during the quarter our progress was particularly evident by the robust level of actively in our retail payments division which as many of you know is our primary focus and the IS growth opportunity for organization today.

We now support payment processing services in the European Union as a result OTI is one of the few -- if not the only cashless payment solutions provider that has full payment processing coverage in both, the EU and U.S. The two largest unattended market.

Also during Q1, we saw a significant pickup in purchasing activity from two of our major North America vending channel partners. This was demonstrated by the series of significant follow-on orders we received reflecting the demand for our industry-leading product and expanded sales capabilities.

However, before I go into further details about our operational progress and outlook for 2016. I would like to turn the call over to our CFO, Yishay Curelaru, who will take us through the financials for the quarter.

Yishay?

Thank you, Shlomi and good morning everyone. Before market opened today, we issued the results of our first quarter in the press release.

A copy of this release in available in the Investor Relations section in our website. As reported in the press release today, our total revenues for the first quarter were $4.9 million which were down slightly from the prior quarter.

However, if you exclude the one-time license we recognized in the prior quarter, our revenues for the first quarter of 2016 increased over the prior quarter. On a year-over-year basis, our revenues were slightly down compared to the less than $5 million we reported in Q1 2015.

Now breaking down revenues by source and by the percent of total revenues. Retail and mass transit ticketing revenues was $2.9 million or 59%.

Petroleum revenue was $1.1 million or 23%. MediSmart and access control product revenues was $560,000 or 12%.

And finally, parking revenues was $300,000 or 6%. Looking at Q1 revenues by geographic region and the portion of each region contribution to the total revenue.

North America accounted for $1.7 million or 36%, Europe accounted for $1.5 million or 31%, Africa accounting for $840,000 or 17%, Asia and Israel accounted for $270,000 or 6%, and South America accounted for $510,000 or 10%. Our gross profit for the first quarter of 2016 increased by 3% to $2.55 million from $2.47 million in the same year ago quarter.

On a percentage basis, our gross margin increased to 52% from 51% in the prior quarter, an increased from 50% in Q1 2015. The increase in both, gross margin and gross profit was driven by efficiencies realized from our outsourcing of manufacturing and production to third-party vendor.

Turning to our expenses, for the first quarter 2016, operating expenses decreased by 20% to a two-year quarterly record low of $3.3 million from $4.1 million in the prior quarter, and decreased 24% for $4.3 million in Q1 last year. The improvement was primarily due to the cost reduction measure we implemented in the second half of last year.

While we have realized the major financial benefit from the efficiency program, it tells us of both, gross margin management and cost reduction, we anticipate margin improvements to this metrics throughout 2016. Nevertheless we will continue to evaluate opportunities to further optimize our expenses structure and enhance operational efficiency.

Our net loss for continued operation improved to $867,000 or $0.02 per share. This compared to the net loss from continued operation of $2.1 million or $0.05 per share in Q1 last year.

Turning on to our non-GAAP results, we use adjusted EBITDA from continued operation, a non-GAAP metric, as we believe it provides a clear indication of our operating results. Our adjusted EBITDA loss from continuing operation in the first quarter of 2016 improved to $395,000 from a loss of $1.1 million in the same year ago period.

As Shlomi mentioned, our adjusted EBITDA for the first quarter marked a two year record low which was driven by our higher gross margin, lower operating expense, partially offset by slightly lower revenues. Please refer today's earnings release for further details about this non-GAAP metric including our reconciliation of adjusted EBITDA to our comparable GAAP results.

Now turning to our balance sheet; at quarter-end we had $9.6 million of cash and cash equivalents and short-term investment in terms of $10.9 million at the end of the prior quarter. We continue to believe our cash flow provides us with sufficient capital and runway to execute our growth plan.

This completes my financial summary. For more detailed analysis of our financial results, please reference our 10-Q which we plan to file by May '16.

I would now like to turn back the call to Shlomi for additional comments and our operational progress and outlook for 2016. Shlomi?

Thank you, Yishay. In addition to our improving fundamentals, we have made tremendous progress executing on our new and long-term growth plan.

A key growth area for our businesses is our petroleum division, OIT PetroSmart. While I haven't spent much time discussing OTI PetroSmart on prior calls, the division is an increasingly important component to our company's growth plan.

For those less familiar, OTI PetroSmart is our global division for cashless payment solution for petroleum sales. The company has a long and proven track record supplying automated fueling management and payment solution to some of the world's largest fueling organization.

Following my appointment as CEO, I quickly realized that in addition to our higher profile little payments division OTI PetroSmart had all of the characteristic of compelling and valuable companies such as industry-leading products, a sizeable market opportunity, high gross margin, and profitability. However, I also recognize that OTI PetroSmart is an appropriate resource to take it to the next level.

Therefore over the last nine months through refocus and reenergized sales strategy, OTI PetroSmart has leveraged its core competency to rapidly gain share in the massive fuel management and automation market. The division progress was evident in Q1 by new partnerships and customer wins.

Along with the success OTI PetroSmart is on the petroleum side of its business, the company is gaining traction with its many small solution, especially in Africa. In April, OTI PetroSmart secured an order from Smart Applications for more than 500,000 MediSmart card.

Importantly, the sale of MediSmart card generate both, product free and recurring licensing fee which adds to our growing base of the current revenue. The OTI PetroSmart is working diligently on several other deployments with major global providers.

We expect to announce new wins in the near future and based on the divisions strong start to the year and expanding pipeline of business we believe OTI PetroSmart is on-track for record year, highlighted by double-digit revenue growth and continued profitability. Switching gears to our retail payment division; our continued execution in this important area of our business was evident by the volume of important strategic partnership and wins secured during the quarter.

This win demonstrating the success and appetite for the new products we introduced last year and early this year which has allowed us to enter into new vertical and geographic regions. Our success also reveals the effectiveness of our go-to-market approach and extensive sales of marketing capabilities.

Along that line, an integral component of our go-to-market approach is to collaborate with leading distributors in key regions around the globe to cost effectively expand our reach and customers footprint. Since the beginning of the year we have entered seven new markets and regions including Spain, Portugal, Italy, Slovakia, Czech Republic, Netherlands, and most recently, Romania.

To put this achievement into perspective this new markets represent an additional 3 million units opportunity for OTI. So not only as ourselves which in target market extended exponentially, our revenue opportunity as has well.

Distributorship also confirm our success building a PAN European distributor network for the unattended vending and kiosk market. In fact our EMEA network now spans 15 leading distributors, resellers, and channel partners who are selling our industry-leading solutions.

We are actively training, educating and collaborating with our partners to capitalize on the broadening market opportunity. To more fully capitalize on this opportunity, we now support payment processing services for vending and kiosk operators in the European Union.

We work close with our country partners to develop an integrated system that leverages our otiMetry telemetry software, CONNECT 3000 and line of NFC-based readers to provide platform for vending and kiosk operators. I'm encouraged to report that the feedback and response to the system from prospective customer has been very positive.

In fact, we secured our first purchase order for our OTI solutions last month which we expect will generate some upfront and recurring revenue starting in the second quarter. Also in Q1 we formed a strategic partnership with Apriva to bring unified mobile and cashless payment solution to the global kiosk market.

Apriva has been great part of us, fully committed to delivering an effective solution to its extensive base of applications, developers, and North America kiosk market. To our joint efforts, we have quickly established a pipeline of meaningful opportunities and are walking closely with them to get this opportunities across the finish line.

Along that line we continue to believe the North America market will be the primary driver of revenue growth in 2016. This was reaffirmed in the first quarter by more than 100% year-over-year increase in all those we secured for our industry-leading results.

Turning to our opportunity and focus in the Japanese market. In step with the marketing activities we are pursuing with our partners billing system, we are making meaningful progress toward achieving full certification of our Felica-compatible products.

We are meeting the deadline established within our product roadmap and believe we will achieve certification during the third quarter. Finally, for our third key region which is Europe, we are actively marketing our expanded product line to the vending, ATM kiosk, and Internet of Things market.

We currently expect our direct and indirect sales initiative will produce meaningful results in the second half of this year. A major element of our long-term growth plan and strategic transition into our global system provider PayEnable platform.

The PayEnable platform follows the Internet of Things trend and provides manufacturers with a convenient offering that covers the entire system and services infrastructure required to turn any product into payment device. This leads manufactures of the need to develop and manage relationships with banks, insurance and other service providers.

In addition to the PayCapsule product, we rolled out earlier this year -- we recently introduced the PayCapsule Flex. PayCapsule-Flex is contactless, waterproof, secure wearable technology that stores payment information alongside personal identification used for making secured transactions.

PayCapsule-Flex is one of the smallest payment cards globally designed for certain existing product and fashion garments with payment devices and wearables. The PayCapsule-Flex is evolutionary, the product is comprised of highly durable yet flexible material making it extremely light weight, bendable, machine washable, as well as water-resistant upto 194 degrees Fahrenheit.

According to Cisco, there will be 50 billion connected devices by 2020. We believe PayEnable is positioned to become the underlying technology and foundation to enable cashless payment for the Internet of Things.

Along those lines over the last ten years OTI established itself as the leading product oriented company supplying NFC readers based primarily to the North America vending market. However, since I became CEO last August, OTI is strategically transformed into platform focused company by leveraging our leadership in the reader market to provide end-to-end cashless payment systems to the global unattended market.

The important distinction is that instead of making one-time hardware sales we are now providing self-serve operators with turnkey system that not only enable the point of self-transaction but also facilitate the ongoing support and monitoring of the operations. This platform approach allow us to target significantly large addressable market while providing an opportunity to generate multiple recurring revenue streams.

Our success this year will be measured by our continued ability to penetrate new markets and verticals, and to generate recurring revenue, as well as our ability to leverage our relatively fixed cost structure. While there is more road ahead, we are confident the successful execution of this plan will position OTI as a growing leader for the Internet of Things.

We are now ready to open the call for you questions. Operator, please provide the appropriate instructions.

Hi, good afternoon. What cost base -- Shlomi, you mentioned in some of your comments towards the end of your prepared remarks there; North America, I believe I heard you correctly, North America will be the main driver of 2016 growth as it pertains to the reader segment.

Is that accurate?

Yes. In 2016 the revenue growth that we are going to generate from the North America region will be still number one.

Okay. And along those lines do you see -- obviously, you've repaired some relationships and you've continue to maintain those existing relationships in North America.

Do you see demands for cashless acceptance accelerating in the U.S. market right now or is perhaps some of that commentary surrounding a little bit of cautiousness on -- don't get your expectations too high on Europe?

No, I think that we will continue to see growth in this market but don't forget that we are not putting all our cards on one vertical. As I mentioned during my statement is that we are focusing on four major verticals; it's the vending, kiosk, ATM, and gaming.

So all in all, for us we will face the growth during 2016 from those verticals.

Okay. Then just -- from a vending perspective, I believe you said you've recently signed your first otiMetry contract; can you give us kind of a sense for how European customers have reacted to the offering?

And then maybe a step further is, as you begin to deploy your hardware -- do you have a target for what percent of your reader revenue could be recurring versus your hardware sales in maybe three years down the road?

In Europe, because this is not -- it's not a one currency and one language and one regulation in all the entire region, the fact that we presented PAN European solution, meaning that we are actually giving to the vending operator the ability not only to buy the reader but also the telemetry and following that we give them also the entire payment processing solution. So for them it was a huge opportunity because we eventually simplified the entire process.

And we make it more cost-effective for small, medium and large vending operators. So this is a significant milestone, not only for us but also for the vending operator in the European market.

At this point of time to forecast what will be the total growth of this market, it's difficult to say but I will say the following; first of all, and I'm trying to be very careful regarding that, I think that we are one of the few, if not the only one, that giving such kind of the solution in the European market and I believe that with the speed that we are recruiting distributors and we are implementing it, it's going to be significant for us in the next three years to forecast which will be the total fleet [ph], difficult to say.

Okay. But just -- just a follow-up on that, not necessarily the size of the complete opportunity in Europe but just maybe the mix of revenue that's more of a recurring monthly service fee versus just a hardware sale.

I think that this year still it's needless to say that the hardware will be number one but we are going to change it, to tell you exactly what will be the ratio between the recurring revenue and the hardware sales; it's difficult to say at this point of time.

Okay. But could you say that you have a goal of getting to 20% or 25% of revenue or is it just too hard to say?

It's too hard to say but let's say that our intention is to make it significant.

Okay, thank you. I'll get back in queue.

Thanks a lot, very nice quarter there. Shlomi, did you say that the orders for North American readers increased 100% year-over-year during the first quarter?

Quarter-over-quarter.

Sequentially, if you say?

Sorry, my mistake, its year-over-year, I'm speaking about Q1 '15 versus Q1 '16. Sorry for that.

It's okay, that makes sense. And I guess can you provide sort of how many units there were and then in those orders how many actually you recognized revenue on?

Unfortunately, not, it's the only thing that they can provide is the growth that we were having and it was significant following the file that we are not giving guidance, it is not something that I can present.

Okay. And then on the -- I guess on the recurring revenue opportunity I know you can't give guidance on sort of percent of revenue from services long-term but I guess in a typical deal, where you are selling otiMetry, what percent would be hardware versus based services, I know it's really a standard deal.

This is also difficult to say because it depends which kind of solution the customer is taking because the number of elements that can be changed from one account from one vending operator to another one and even inside one vending operator between the different companies, it's quite significant because it's related first of all which kind of reader is taking; second thing if he is going to use 2G or 3G; if he is using 3G or WiFi so there are few elements that according to that we are implementing the otiMetry solution and that's the beauty here because what we are doing -- the way that we are implementing the payment processing solution is according the need or let's say we are tailoring the needs or we are tailoring the system according to the needs of the customer. And that's the reason that your few partners -- that we need to calculate before we are generating a solution, even by the way that it's quite simple, it's not something that it's complicated because we were making it quite easy to implement.

Okay. And then how do you think about I guess a seasonality in your business at this point or is it some -- did you expect some quarters to be noticeably stronger or weaker than other or is it more and more linear throughout the year?

How do you generally think about seasonality at this point?

Look, one of the things that we are facing at the moment -- we are running very fast, in the last nine months the amount of changes and the way that we are running the company and the entire restructuring that we implemented creates some kind of -- let's say new environment in the company. So I believe that it's too early to say how the company will behave in the next coming quarters but I believe that by the end of this year we will start to be a little bit more normal regarding the sales and the revenue that we are going to generate.

At the moment we are running very fast. And I think that you can see it because this is the second quarter that we are improving our result and the intention is to continue in this speed, at least in 2016.

Yes. And then last question, did you say that you -- did you see the opportunity for additional operating spends, refinements or reductions or should we think about that kind of stable at this point?

In the last nine months as I mentioned before we were running very fast and the idea was to create a very lean organization and I think as we achieved this project to be very lean. We are not going to stop the efficiency program that I established last August.

But I think that the quarter two [ph] lead that we were doing regarding the cost cutting and so on will not be in such scale in the common quarters. But definitely we will continue to improve our results; we are not going to stop.

Okay, very good, good luck, thank you.

Thank you.

Hey Shlomi, how are you?

I'm fine. What about you?

Pretty good, nice quarter. Just a couple of quick questions.

Do you talk on easy fuel about double-digit growth for this year? Double-digit is a large area from 11% to 99%, did you narrow the gap?

As you know I cannot give any guidance but let's say that it will be a very healthy growth.

Okay. And the second question -- your net cash is about $3.5 million, do you feel that that's enough to get you through the next two or three quarters and not have to do with secondary?

I would say the following; following the fact that we were running very intensive cost reduction and as I mentioned before that efficiency program that we established last year, I think that we reduced the risk-related to the cash element. Meaning that this is not an issue for OTI anymore.

Okay. I appreciate and best of luck.

Thank you.

Congratulations on the progress gentleman. Shlomi, I had a couple questions related to Europe.

First, you've announced several distributor relationships in the last few months but primarily, and in the smaller markets within Europe, is there a timetable or a prospect that we'll see announcements addressing the bigger markets; France, Germany, Great Britain etcetera.

Yes, first of all, those guys that we recruited in the last quarter, they are not so small because the potential that they are raising in the growing market is, you can say that it can be significant. Regarding the major markets that you mentioned; Germany, France and other region, sub-regions, I believe that this is part of our targets and I believe that relatively soon we will generate results also form data from regions in Europe.

Okay, thank you. And next I had a question about the economics of the European business.

It seems like a different sort of opportunity from what you've done in North America which is primarily reader sales to a few big customers. Given that you're going after more fragmented market and you're also selling more products, not just readers, couldn't you characterize how the economics might be different, whether the average selling price is different, whether the margins are different, how should we think about that?

It's a good point because part of our strategy, as you mentioned is not only selling hardware or not only selling readers and that's it. The idea is to give full solution.

You can see by the way with the fact that we established over otiMetry and you can see by the way something but it's for the long run -- the PayEnable platform. In both cases by the way, the recurring revenue element is the major one.

And the many we hear is to create first of all recurring revenue, this is one thing. Second thing is to deliver a full solution, not only product but also a solution.

And this is something that you can see by the way; for example, in North America with Apriva, and this is something that you can see with the entire distributors that we renew. And hopefully for the long run it will be also in Japan.

The long-term target that we are raising, also in Japan by the way is to generate a full system.

Great. Understood Shlomi, but my question is actually about the different economics from these new markets.

I'm wondering if perhaps you could quantify how -- say a new install in Europe would differ from a traditional one in North America in terms of the revenue you would garner? Maybe a ratio of what a European install would look like relative to traditional North American one?

This is difficult to say, look if you're looking to see what is the differences between the two region, the European region is paying premium, something that the North American market is not paying. In the in the North American market by the way, they operate -- the big spending operators are actually giving the solution today.

So they are almost doing everything. In Europe, it's not working like that; it's a little bit different.

So potentially the gross margin the we are generating a new one is much more higher than in North America. But to give you the split or to give you the other element, it's little bit difficult at this point of time.

So a possible answer to my question would be something like a new install might be 10% greater than in North America, it might be twice, it would seem that there would be a range that you could assign to the larger sale that would going to Europe?

Look, I had some kind of difficulty to answer that because this is actually -- I need to step into some kind of guidance that I'm trying to avoid but I think that I gave you the basic regarding characteristic regarding the two different region here. From the other end when you're looking at the North American region that volume is much more bigger than in Europe.

At least at this point of time for us.

Okay. One last question, you mentioned that you finished the quarter with $9.6 million in cash; you burned about $1.4 million.

Should we think of that $1.4 million burn, is it ongoing run rate or was that perhaps higher than what you think we would see going forward just based on changes to working capital accounts?

This is Yishay. I think what you just saw, I think it's going to be the regular fresh brand that you're going to see in the next quarter.

And as for their run rate, you have sufficient internal resources if this is what you're referring to.

And that's part of the question, I guess just in terms of how we should think about the future though. Should we think about your operating expense run rate as holding about steady going forward or not?

This is the guidance and we are not providing guidance as we said before.

Okay. Thank you very much.

Hi, just one or two more. Kurt touched on a couple of topics I wanted to get more color on.

But as far as I believe in your comments you referenced the partnership with the ATM partner, the max-type reader partner. I believe the press release that you had out suggested 200,000 readers was your initial target.

I believe, I probably assumed that was over a couple years. Is that still realistic?

Have you begun. deployment of those UNO readers yet?

And when should we see the significant ramp in that relationship?

At this point of time we are walking very closely with this partner and we are actually in a process to finalize the entire certification progress with relevant ATM machine in different countries. And this is something that we have plan to finalize during this quarter if assuming everything will work perfectly.

This is our target by the way and I believe this we will achieve this target.

And so can you quickly begin rolling those out once certification is achieved?

Yes, under the assumption that we will finalize the entire certification progress, I think that the next step or the next milestone will be PL.

Okay. And so you expect to deploy the first of those in the second quarter or is that more of a third quarter start time?

At this point of time it's difficult to say but let's say in order to be realistic we are targeting on the Q3.

Okay. And then as far as Japan, obviously Japan is a really exciting opportunity and I believe you mentioned in your prepared remarks that you were hoping to achieve certification of the Felica and NFC reader prior to third quarter.

Yes, but at the beginning of Q3, that's correct.

And so should -- do you expect to be generating revenue by the end of the year or is that more -- I mean obviously, I know that the big growth opportunity is probably 2017 but will we see revenue in the third or fourth quarter of this year?

This is our target, we are doing whatever is needed in order to see some revenue form the Japanese market. The reason is that we are investing heavily at this point of time together with our partner billing system in order to establish the partnership as a significant supply with Felica reader and to tell you now and to give you a guarantee that we will see our appeal by the end of this year, this is our target.

To tell you if it's can happen, it's little bit difficult to say at this point of time but first of all the most important thing we need to close the milestone of having the certification, the Felica certification. This is the most important thing for us.

So we are doing it step by step.

Great, thank you so much. I appreciate it.

Thank you.

One more quick question, could you give some color on the wearables in terms of when you would expect to see sales? Is that -- are we into 2017 for that or do you think that might happen in 2016?

If I need to start from -- to give to a direct answer I believe that significant appeal we should see during 2017. But in -- something that is very important to mention is the fact that in almost no time we generated this -- a new divisional of the Internet of Things with the wearables that we are having, the very innovating.

My target at least at this point of time to make sure that we will earn few pilots with commercial customers. And this is a target for us and we are doing quite a lot of effort in order to make sure that we will achieve this target.

So this is a major milestone by the way. Before we are jumping to the revenue stage, we are now making sure that we are presenting the right solutions, and I think that we are in this direction.

And the second thing is to make sure that we can add at least few pilots in the field in order to establish our full solution and the most innovative one to the market. And I think that we are in this direction.

Okay, thank you. I appreciate it.

Thank you for joining us today. I would like to thank our employees, partner, investors, and customers for their continued support.

We look forward to updating you on our next call. Operator?