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On Track Innovations Ltd. (NASDAQ:OTIV)

Q3 2008 Earnings Call

December 1, 2008 9:00 am ET

Executives

Oded Bashan – Chairman and Chief Executive Officer

Ohad Bashan – President

Tanir Horn – Chief Financial Officer

Analysts

Andrew Holm - Daugherty & Company, LLC

[Jay Meyer – Selsone Company]

Marc Silk - C. Silk and Sons

[Alan Olansky] – Andrew Garrett

Stephen Silk – C. Silk and Sons

Operator

Good morning, good afternoon to all OTI investors, analysts and other interested parties worldwide on our third quarter 2008 results conference call. As a reminder, the conference call is being recorded today, December 1, 2008 and a replay of the call will be available on the following U.S. toll free number, 1-877-456-0009 until December 8. A transcript of the prepared statements will be available on our website at www.otiglobal.com in the Investor Relations section.

With me today on the call are Oded Bashan, OTI’s Chairman and CEO; Ohad Bashan, OTI’s President and Tanir Horn, OTI’s CFO. You should have received a copy of the press release issued before the market opened this morning. If you are not on our distribution list, please contact us at info@otiglobal.com and we’ll be happy to add you for future information.

Out statements today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Whenever we use words such 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 various risks and uncertainties and actual results, performance or achievements of OTI could differ materially from those described in or implied by these statements.

For example, forward-looking statements include statements regarding our goals, beliefs, estimates, future growth strategies, objectives, plans, or current expectations relating to future financial results or other aspects of our business.

Forward-looking statements could be impacted by the effects of the projected evaluation and validation period in the U.S. contactless payment cards market; the ability of OTI to successfully integrate the assets and operations purchased from SuperCom into the operations of OTI or to otherwise realize the expected benefits of the acquisition; market acceptance of new and existing products; and our ability to execute production on orders as well as the other risk factors discussed in OTI’s annual report on Form 20-F for the year ended December 31, 2007, including the documents incorporated by reference therein, filed with the Securities and Exchange Commission.

Although OTI believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its 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. At this point, I would like to turn the call over to Ohad Bashan, President of OTI to discuss the results. Mr. Bashan, would you like to begin?

Ohad Bashan

Thank you. Thank you all for joining today’s conference call. I will give an overview of the results and business developments and we will then open the call for questions which Oded, Tanir, and I will address. I would like to take this opportunity and to welcome Tanir on her first call as OTI’s CFO.

The first nine months results are in line with our expectations, with revenues of $31 million relatively flat compared to $30 million in the first nine months of 2007. Based on current visibility and assuming no project execution will be impacted by the global market conditions and instability, we are maintaining our guidance. In the third quarter, we saw improving gross margins, growing revenues, lower cash burn and have been able to secure new projects with high margin recurring revenues with clear view to commercial rollouts.

We are closely monitoring the global market conditions, our customers financial situations and making sure we’re staying on top of the development, implementation and our financial obligations, all with a view to maintain our growth and profitability plans for 2009 and beyond. We are primarily focusing on controlling and reducing our operating expenses to the most efficient and effective level required to carry out our current and pending pipeline of projects for 2009 and 2010.

We believe that our strong and healthy balance sheet with more than $100 million in total assets and $32 million in cash, cash equivalents and short term investments, together with a continued shift and focus toward high margin commercial rollout with recurring revenues, will pave a clear path to profitability for OTI.

During the first nine months of this year, we took significant measures in order to meet our goal of reducing our operating expenses. We are on track to reach our goal of limiting our quarterly operating expenses on a non-GAAP basis to $7 million, coming very close in the third quarter short of unforeseen legal fees and the weakness of the dollar versus other currencies. Total operating expenses for the first nine months were $28.6 million on a GAAP basis and

$22.5 million on a non-GAAP basis.

Our operating expenses include about $1.8 million that represent the weakening of the dollar versus other currencies. During the first nine months, we burned $8.9 million in cash from operating activities. In the third quarter, we saw better results than the first previous quarters and the same quarter last year. Revenues increased by 10% to $10.9 million and the gross margin increased to 44% from 36 as a result of the revenue mix for the quarter.

Our operating expenses on a non-GAAP basis declined by 26% to $7.9 million. These expenses include extraordinary expenses related to legal fees for [Smart Tracks’] lawsuit of around $600,000. Significantly, GAAP net loss decreased by 39% to $4.8 million and non-GAAP net loss decreased by 46% to $3.2 million. We were also able to decrease the cash burn from operating activities by 59% to $1.7 million from $4.2 million in the second quarter.

In our press release we included a comparison between the first nine months and third quarter of 2008 to those of 2007 on a non-GAAP basis. In the reconciliation of GAAP to non-GAAP results on our P&L, FAS 123R and EITF 96-18 had very little impact on COGS. It did however have a significant impact on operating expenses. The impact of FAS 123R and EITF 96-18 on the first nine months of 2008 operating expenses was about $5.1 million. Amortization of intangible assets was about $1 million. The impact on the third quarter of 2008 operating expenses was about $1.2 million. Amortization of intangible assets was $360,000.

As we published earlier today, OTI’s board of directors authorized to initiate a process in order to enable us to execute the program for the repurchase of OTI shares. We are doing so as we believe the strength of our balance sheet allows us to support current and future opportunities while increasing shareholders value. We believe we have an excellent opportunity to capture value that we believe is not reflected in our shares at current prices. The specific terms of the program are yet to be determined. The total aggregate amount will not exceed $5 million.

Under Israeli law, the program requires court approval. Accordingly, OTI will file an application with the District Court in Tel Aviv, Israel in the next few weeks to initiate the process. The company is not obligated to acquire any specific number of shares and the program may be suspended or discontinued at any time.

OTI provides superior contactless market products, technology and solutions in three primary vertical markets; payment, petroleum and ID. We are making progress in all vertical markets. Looking at the revenue breakdown for the first nine months of 2008 by vertical markets, the payment market was 47%; petroleum market generated 10%; the Smart ID market generated 19% and OEM sales were 24%.

The geographic mix of revenues for the first nine months of 2008 was as follows, Europe was 52%; Asia accounted for 15%; Americas 11%; Africa 12%; and Israel 10% of revenues. Our pipeline of new projects continues to increase as a result of our long term strategic initiatives on multiple fronts. We are enhancing and broadening our relationships with China partners and qualifying OTI products with the right organizations.

While these relationships are expected to yield significant revenues to OTI over time, they involve processes characterized by long and extensive testing and qualification before revenues can be realized. The qualifications and diligence is done on the basis of the product company support and financial stability. I am pleased to say that we are making progress with these companies and hope to be able to report on it soon.

We are making headways in being able to secure additional projects in the verticals of ID, petroleum and payment, with most revenues realized in 2009 and beyond. These projects are expected to provide higher margins and contribute to our growth. Our offering in the payment market includes solutions for contactless banking cards, mass transit solutions, and innovative parking meter called EasyPark.

We offer cards, readers, and production machinery based on years of experience and a significant IT portfolio that results in a superior product in terms of do-ability, performance, and throughput. OTI’s offering to the contactless banking market is unique in that we provide both card and reader solutions for both the Visa and MasterCard contactless programs. Our focus in the contactless banking card program is to support MasterCard and Visa in their efforts in the different regions.

The EMV market in Europe offers a great opportunity for OTI. The more stringent product requirements mean that we are able to leverage our technological know how and offer a fully certified product to the card associations, banks and merchants. This quarter we also announced that OTI Saturn Countertop and Outdoor Readers received global approval for MasterCard and Visa contactless payment program. This is specifically important. This is a development of new markets beginning to adopt contactless payment solution, mainly in Europe.

We are already experiencing strong demand for readers as new markets in Europe begin to adopt contactless payments. We continue to work through market leaders to integrate our reader technology with the product as well as working with [living] card providers to offer card solutions to financial institutions.

We introduced new product solutions such as the Smart Sticker, an entirely self-contained, contactless payment device that adheres to multiple surfaces including mobile phones, PDAs and more. The special configuration and adhesive on the back of the Smart Sticker makes it easy to attach to any surface, be it metallic, plastic, or other. This feature enables issuers to add contactless payment capabilities to existing mobile devices independent of the handset type and model.

Although not directly related to the payment market, we also announced recently that OTI supplied Air New Zealand, New Zealand National Airline with OTI’s Smart Sticker to help frequent travelers on New Zealand domestic flights check in and board faster. The OTI Smart Sticker serves to upgrade products already in circulation, providing quick time to market, cost effective solution which is expected to assist issuers in increasing market share.

We are happy to report that in line with our strategy to continue shift in project and revenues originating high margin recurring revenues and transaction fees specifically, ASEC our subsidiary, was awarded a contract to become an e-ticket operator of Warsaw City Card for Transport Department of the City of Warsaw. That includes providing sales network system, infrastructure, distribution service, and maintenance for loading the transportation [20] cards around the city.

The revenues will be generated from transaction fees and are expected to aggregate more than $10 million over the next five years. The infrastructure equipment is to be installed and operated by ASEC and financed by ASEC through Polish banks. The project is expected to start earning revenues in the third quarter of 2009. ASEC is the second e-ticketing operator in the city of Warsaw.

In addition to our EasyPark operations in Israel, we have obtained two international markets in which we are operating. In the third quarter we announced that PARX, our subsidiary and Neos Tech are introducing EasyPark in Italy, starting with the northern city of Alessandria. PARX will manage the program with Neos Tech, an Italian company focused on public services, parking, and IT. Neos Tech is responsible for the marketing, sales, help desk, customer support, installation, and all local services in Italy. Neos Tech has launched a strong marketing campaign including print and broadcast media on the consumer website.

This is in addition to the already announced operation introduction of Parking Solution in France. These projects generate both products and growing high margin recurring revenues via transaction fee and ongoing support.

In the ID markets, our product offering include an end-to-end ID solutions for electronic passports, border crossing, national ID, and medical cards. The unique solution is based on significant IP including a patent portfolio that covers manufacturing techniques of location processing and more. The system is based on OTI’s Magna, a modular platform that offers short implementation and quick integration with a country’s existing border control system, and provides external interfaces to the country’s central electronic certificate storage for signature verification.

We’re still expecting to report progress in our project for manufacturing and selling electronic travel documents in [inaudible] for a major Asian government before the end of this year, with a view to commence commercial production next year. In the third quarter, we announced that OTI signed a contract with the Electrical Commission of an African country to implement the upgrade of the country’s permanent voter registry, including new biometric based border cards.

The value of the initial contract is over $2 million with more than $1 million expected to be realized this year. The project objectives are to verify the voter identity, detect, and avoid double registration attempts and issue a new photo ID card bearing advanced security features which will be used in the upcoming elections. The system will insure one person, one vote.

MediSmart is our modular health ID solution, which transforms the patient’s electronic health record to a forwardable medium, enables sophisticated patient and provider authentication, implements secure encryption and provide integration with legacy health IT systems. MediSmart is another successful implementation of our business model, in which revenues are generated not only from product sales but also from transaction and licensing fees.

We recently announced that in Kenya, SMART, a Kenyan company committed to delivering technology-driven healthcare solutions, has placed an order for an additional 100,000 MediSmart cards which are to be issued by multiple medical scheme managers. This expansion comes after SMART has already issued approximately 100,000 cards and deployed 340 points of service, hospitals, pharmacies and general practitioner sites across Kenya, enabling patient authentication, verification of benefits and claims processing in a seamless electronic process.

In the petroleum market, we received positive feedback from the [issue] implementation and we estimate that the solution will start to be implemented in Asia-Pacific during next year. To summarize, during the first nine months of 2008 we focused on making global operations more efficient and effective by reducing our expenses while increasing our projects pipeline. Our current level of expenses reflects this, while we continue implementing cost saving measures.

In parallel, we are focusing on securing high margin projects with the current revenues and building a strong pipeline focused on short and mid-term growth. As we have indicated, it is our belief that most of significant delays are behind us and we are confident about the company’s growth. We are monitoring closely the global market conditions, our customers financial situation and making sure we are staying on top of the development, implementation and our financial obligations, all with a view to maintain our growth and profitability plans for 2009 and beyond.

Now we will be pleased to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Andrew Holm - Daugherty & Company, LLC.

Andrew Holm - Daugherty & Company, LLC

Ohad I just wanted to make sure that you are maintaining your guidance. Is that for the 10% revenue growth this year?

Ohad Bashan

At the moment with the current visibility of projects and assuming that the global instability is not going to impact any project execution, we are maintaining our guidance of close to 10% growth, yes.

Andrew Holm - Daugherty & Company, LLC

And are you guys seeing any impact kind of for your pipeline projects from the global economic situation?

Ohad Bashan

We do see an impact of in some markets, specifically relating to the U.S. market of the global instability, but as I indicated at this point it’s too early to say whether it will impact the overall revenue for this year or not.

Andrew Holm - Daugherty & Company, LLC

And then just on the contract in Poland. How are you guys expecting to or how much are these initial machines that you’re going to install, how much are those going to cost? And how should we view the ramp, the project over, you know, the first five years and then onward?

Ohad Bashan

So obviously take into consideration that this is a plan right now and it’s not guaranteed, the overall plan in this program is that on the third quarter in 2009, we will start initiating revenues from the project. The total investment is expected to be around $4 million, which is to be financed by Polish Banks and the obviously most of the income will start to be generated in 2010 from any transaction fees based.

Operator

Your next question comes from [Jay Meyer – Selsone Company].

Jay Meyer – Selsone Company

The U.S. Department of State is expected to re-bid their e-passport contracts relatively soon. How are you positioned for that?

Ohad Bashan

When the bid is going to come out, we will assess the best strategy to support it.

Jay Meyer – Selsone Company

Would you expect to try and attempt a prime contracting position or a sub?

Ohad Bashan

I think at this point and the forum that the question is asked, I don’t think it would be an appropriate thing going – advantageous thing for OTI to answer this question. We are considering all options, you know, that to position OTI in the best way forward regarding this specific project and other projects as we are doing on a daily basis, monitoring the market situation.

Jay Meyer – Selsone Company

You mentioned in your statement that your guidance assumes no meaningful impact from the global economic crisis, and I wonder how you can make that kind of a comment given the pervasiveness of the global economic crisis. I mean, can you give us some color as to how you are making your assumption?

Ohad Bashan

The thing I can share with you, as you know, we have not expected 2008 to be a major

[Audio Impairment – 3.5 seconds]

We’ve said it all along; there were few projects in the pipeline that we have considered when we gave our guidance at the beginning of the year and when we repeated it in the second quarter as well. Based on these guidelines – sorry, based on this pipeline and the current visibility, we don’t see a reason to change our guidance. We are impacted obviously, by the global instability and but such impact at this point does not make us change the guidance for the year.

Jay Meyer – Selsone Company

Could you please reiterate your view on the Asian joint venture once again? Your expectations with respect to that.

Ohad Bashan

We are still expecting to report progress on the Asian JV before the end of the year. We still have one full month before the end of the year and with the expectation to commence commercial production next year. So our plans have not changed at this point, and this is what I can report on.

Jay Meyer – Selsone Company

And is there a – well, let me ask the question a little differently. You completed the development of the manufacturing facilities in China and your former CFO is now running those operations in China. Would you expect that manufacturing facility to support the program with the major Asian country, the joint venture?

Ohad Bashan

The operations in China of [MCT], our subsidiary, is supporting all of OTI e-cards, travel documents, inlays, key fobs, Smart Sticker products. As such, it will support also in the bigger programs.

Jay Meyer – Selsone Company

So product that you’re producing out of your China operations you would anticipate would end up in the travel document produced for the major Asian joint venture?

Ohad Bashan

Some of the products that we obviously – not all the products will end up there, but some of the products that – the card products that the MCT is producing obviously addressing this opportunity and they’re closely supporting the major Asian country opportunity.

Jay Meyer – Selsone Company

Okay.

Ohad Bashan

I think I hear the answer is yes at the end of the day, yes.

Jay Meyer – Selsone Company

Well, yes, it’s a pretty simple answer.

Ohad Bashan

It’s straightforward, yes.

Jay Meyer – Selsone Company

So can you give us an idea of what your production, your capacity utilization is right now in your Asian – in your China manufacturing facilities?

Ohad Bashan

In answer to you right now, we are not running at full capacity unfortunately. We – at the current capacity that we have is 6 million units per month, but right now we’re not running at full capacity. As I indicated previously on this call, we do see impact on the global instabil – from the global instability specifically on the U.S. market, specifically in the U.S. card payment market, which we have not included significant growth in this year for in the OTI plans. And maybe this will allude to the question before, but we do see impact and right now we’re not running full capacity at MCT.

Jay Meyer – Selsone Company

Are you willing to ballpark? I mean are you producing any product out of that division at all or?

Ohad Bashan

Oh absolutely, absolutely. That subsidiary is producing millions of units as it is per month. My indication was on full capacity. You asked me if we were running full capacity and the answer is no. We are obviously producing. It’s a major facility that is providing production line and card products and passport solutions and key fobs and stickers and all sorts of solutions. You can see it also in the news releases that we’re putting from time to time on projects that we are securing.

Jay Meyer – Selsone Company

My question was on capacity utilization rates, if I wasn’t clear I apologize. Can you give us an idea of what your capacity utilization rate is right now in those facilities? You say millions per month out of a 6 million unit per month capacity. Is that 3 million per month you’re producing or 5 million?

Ohad Bashan

Right now we are running at about 50 to 60% utilization over production capacity.

Jay Meyer – Selsone Company

And last quarter you – during the last conference call you suggested that in 2009 you expected to breakeven. Can you reiterate that as well or give us an idea of how you’re feeling about that statement?

Ohad Bashan

Right now, we have no change to the guidance also for next year. Obviously we have not provided clear guidance next year. We did provide a goal that we – our aim is to be breakeven on an operating level. We’re still maintaining that obviously. We are closely monitoring the global situation. We will provide accurate or more specific I would say guidance when we will announce the annual results for 2008.

Operator

Your next question comes from Marc Silk - C. Silk and Sons.

Marc Silk - C. Silk and Sons

You know, it’s when I started following your stock about two years ago we were, you know, I was getting excited about the recurring revenue model and I was focusing on the petroleum, but it looks like after your recent press releases the parking and the medical card are very exciting, so let me kind of focus on that for right now. On Italy on Neos, how long has Neos been working with you?

Ohad Bashan

Several years.

Marc Silk - C. Silk and Sons

It seems like, and I checked out their website they’re making a nice commitment, so basically what is their strategy? Do they want to basically capture the entire country or a specific region or kind of what are they thinking?

Ohad Bashan

I cannot answer on what they’re thinking, but from what I know they are very serious and committed to the success of the program, the parking program and I know that their focus is in Italy starting in the northern part of the country.

Marc Silk - C. Silk and Sons

And I know on the EMV parking you get about $20 per parking meter but can you kind of fill us in kind of the percentage of the revenue that you’re going to get from the parking?

Ohad Bashan

Unfortunately at this point I cannot disclose the exact percentage that we are getting. I can only say that we are getting transaction fee based revenue from this project. And it’s important to emphasize the awesome responsibilities in executing the program. And the [holes] are such that Neos is responsible for the local marketing, support and basically all the obligations that are on the operator. And OTI parks and more specifically is responsible in providing the system, the tech support, the product, and ongoing service.

Marc Silk - C. Silk and Sons

In Israel do you have about 25% of the market? Is that correct on the parking?

Ohad Bashan

No. In Israel, the comp statistics that the [Seven Morgan] 70% of the transactions in parking are being performed with EasyPark. There are now close to 600,000 devices in the Israeli market, which is much more than 25% in northern Israel.

Marc Silk - C. Silk and Sons

Have you seen like that percentage go up every quarter, every year? I just want to be able to get a feel for the growth of that.

Ohad Bashan

Right now what we see is we see constant growth in the level of transactions that are being performed in the system. Obviously this is a direct result of the number of devices that are out there. Obviously when you are looking at the overall market, it’s not – that they even add it to the growth in number of devices that you can sell, and then the key is to make sure that you can get more value per device or increase the volume per device in terms of usage, user applications, etc., etc. You have to remember that Israel is over five years of implementation.

What encourages us with the EasyPark program in Israel is that it manifests on our business model. We see a very profitable business model. We see good operation. We see excellent consumer feedback. And the minimum investment in marketing campaigns and mainly word to mouth save.

Marc Silk - C. Silk and Sons

In France, I’m looking at your prospectus of the 1.4 million in shares. Now this company’s structured financial group, can you kind of fill us in? Is that something where you’re going to pay them if they hit milestones as far as getting parking – cities signed up and is that specifically for France? Or is that a different country?

Ohad Bashan

I think you mixed up two different opportunities, Marc. France we have acquired a company that is called ID Parking. Through the end result of this is a company named PARX France and through PARX France we are aiming at maintaining ID Parking existing cities and also introducing EasyPark into existing cities and new cities for the already established local operation. This is one area and we are working on that as we speak.

The structured financial group relationship is mainly for a marketing platform, and they’re a marketing company that is working with us on multiple opportunities that we are identifying together and assisting us to secure large projects. And their remuneration is based on success as indicated in our filings.

Marc Silk - C. Silk and Sons

So are they working on parking or other opportunities?

Ohad Bashan

They are not necessarily working on parking but they are working on large projects where we together identify and where they have unique added value to help us bring more business to OTI at the end of the day.

Marc Silk - C. Silk and Sons

You know, because this is a tough environment. Obviously the amount of money that you can save a municipality is probably a very good marketing scheme for you going forward, you know, obviously with [stealing the quarters] and the maintenance, etc. So do you see yourself going into other countries in 2009 besides the ones that you’ve mentioned?

Ohad Bashan

I think that we’ve already identified a few countries that we are interested in promoting the parking solution there. We are very busy right now in identifying the right partners, local partners, that can help us get into these markets. It is very important to understand that the operation in Italy and in France, the first two projects outside of Israel that we are taking upon ourself on a commercial level, and it is extremely important for us to repeat the success that we are having with EasyPark in Israel to insure our partners that the system is stable, solid, and ready to be rolled out in a big way in other, in additional countries.

So at this point we are very, very focused on execution and getting the programs that we already secured into a successful, commercial production.

Marc Silk - C. Silk and Sons

Let’s switch to medical cards. In Kenya, you know, you mentioned a million cards over the next 24 months and the chairman at SMART thinks that they will have a million cards over 12 months. That was in the press release so I’m a little confused. You’re trying to be conservative obviously. Are they trying to be aggressive or where’s the real number, the timeframe?

Ohad Bashan

Marc, the real number we’ll know in 24 months time, but the quote on the press release that you’re alluding to was from SMART’s chairman. It is their belief and they wanted to make sure that everybody knows what their intentions are and what their expectations are. It’s not OTI’s expectation. It is SMART’s expectation and they’re our partner in this local market. In their belief, they will reach a million cards in the next 24 months.

I can only support and add my $0.02 of belief to that, but it will really depend on their ability to execute the program in the local market. We are the technology provider. We’re not the operator in the Kenyan MediSmart solution.

Marc Silk - C. Silk and Sons

And what is the potential market for medical cards in Kenya?

Ohad Bashan

The potential market is at least 10 times bigger than the number that is quoted in the press release, but obviously we’re not going to commit to that right now.

Marc Silk - C. Silk and Sons

And have people looked at this, looked at you, the Kenya project yet as far as maybe potential customers down the line? Or that’s still too early?

Ohad Bashan

We are getting requests and indications of potential partnerships in places doing some MediSmart. But as we indicated before, for us I think the right strategy, the right approach is to make sure that the client opportunities that we are busy with, and projects with MediSmart are successfully executed before we are taking this to other countries.

Marc Silk - C. Silk and Sons

Because you know it’s interesting at Mt. Sinai I read a study and basically they said that duplicate patient records were a big cost for hospitals, you know, charging the patient and health insurers saves them money, etc. So again when you get to a tough economy, this is something that you can market saying we’re going to save you money so this is another area that you’re definitely in the right spot. So this could be exciting.

Have you considered maybe dual listing on the Tel Aviv Stock Exchange? And the reason I brought that up is because number one is, people are familiar with you over there because of your EasyPark and then also on the exchange, once you hit a certain price level you might be added to an exchange which could actually add more, let’s say, visibility to your stock.

Ohad Bashan

Marc, as you know, we are constantly considering how to improve shareholders value. At this point, I think that the right approach from OTI, specifically within the market conditions and staying very lean on the operations, focused on our strategy will be to maintain one single market. We believe that the U.S. stock market, NASDAQ, is the right market for OTI to be in and to be the best platform to increase shareholders value.

Marc Silk - C. Silk and Sons

I do want to commend you on the share buyback. I think I agree with you the potential you have, the stock is quite undervalued. One thing I wanted to bring up is that I know in this environment there are a lot of private companies that are having trouble getting financing and I know you’ve said that you’ve come across some of them that you compete against and they slash these prices. So another way to use some of your cash is maybe before these companies go belly up, is there someone there that’s kind of looking at that opportunity?

Ohad Bashan

As always, we are always looking at opportunities to enhance OTI position in the market, to increase the product offerings. But one has to consider the global market situation, the specific vertical market situation and the – and if it’s a company that is going out of business, is it better to take them or are you adding more trouble to yourself. So we have to always look at everything on a case by case basis.

At this point, OTI focus is to continue on the strategy of reducing the operating expenses, staying extremely focused on the opportunities we have in hand to make sure that as much as we can - to make sure that these opportunities are going to go from pilots or stage one project into commercial all out, that can – that we can see the return on investment from our side. We can see revenues coming in. We can see high margin revenues. I think that by itself will make OTI very, very successful.

Operator

Your next question comes from Jay Meyer – Selsone Company.

Jay Meyer – Selsone Company

Very quickly, regarding the potential stock buy back, when would you expect or when would you guesstimate we could have a determination on that from the government?

Ohad Bashan

First, it’s from the court. We have to file with the District Court in Tel Aviv. It’s very; very hard to give a commitment on when the court is going to get back to us with the decision. We are expecting to file in a few weeks and I would love to be able to tell you how long it will be before we get an answer but I think it’s not going to be responsible for me to say so.

Operator

Your next question comes from Marc Silk – C. Silk and Sons.

Marc Silk – C. Silk and Sons

Ohad, you mentioned on the last conference call that you have potential four pilots on the payment side. Is that still – I know that’s not a lot of revenue but it’s just getting into new markets. Is that still on track or because of the economy maybe not so much?

Ohad Bashan

What I mentioned in previous calls is that we are basically following MasterCard and Visa wherever they’re going. And right now, from what we know, there are several countries specifically in Europe that will start implementation of contactless program next year. In some of these markets we’ve already secured the initial orders for the – mainly for the infrastructure. If the economic situation is going to impact the pace of introduction, it’s not for me to say so. We will have to wait and see.

Obviously as indicated before, and I’ll have to repeat it, we do see an impact specifically in the U.S. contactless payment market. We have not encountered too much – we’ve not taken into consideration too much growth in the U.S. contactless payment market or banking market specifically this year, anyhow.

Marc Silk - C. Silk and Sons

Yes, I think banks are focusing on a few other things. So I would assume that you’re taking some of your expenses from that area of your business and either making – able to make cuts there or moving to areas that you see some significant growth, I would think. There was something George Bush came up with. He wrote, there was something in the Boston Globe, no visas required for six countries and it looks like for this to happen, they have to take specific steps such as coming up with tamper proof biometric passports that are difficult to forge.

I’m assuming this is going to go beyond six European countries. Are you seeing an opportunity in this?

Ohad Bashan

The growing – the [20] possible, the growing demands and requirements in any travel documents obviously creates an opportunity for OTI whether directly or for channel partners and is expected to grow our business, absolutely.

Marc Silk - C. Silk and Sons

Any update on [Hara]? Have you sold any units? I know sometimes people don’t want to know that you’re selling them because of confidentiality, but do you expect to sell some of these units and the products that go with it?

Ohad Bashan

We have received excellent feedback on the introduction of the Hara production line. We are in – I can say that there is going to be revenue from the production line. I cannot say from whom and I cannot say when, obviously.

Marc Silk - C. Silk and Sons

If something does happen would you be able to say it then or it’ll be more confidentiality?

Ohad Bashan

I hope so, but I cannot guarantee. I can tell you that the Hara production line is already – we’ve already sold production lines, but obviously in some of the partners would prefer not to mention them for obvious reasons and we have to respect that.

Marc Silk - C. Silk and Sons

Can you give me kind of what as said kind of at the – feedback from the card show in Paris as far as people’s looking at the Smart Card, etc.?

Ohad Bashan

I think that the cards show in Paris last month was a very good show. Discussions were very specific. Attendance was good. The number of exhibitors were good. It’s definitely one of the most important shows for the Smart Card market. We had very good feedback from this show.

Marc Silk - C. Silk and Sons

And last your secondary supplier strategy, any progress on that?

Ohad Bashan

As I have indicated in the call, we are working very hard to increase the our relationships with different channel partners in order to provide our products to them, to be able to compete on opportunities that we are not able to compete and participate in by ourself.

Operator

Thank you. Your next question comes from [Alan Olansky] – Andrew Garrett.

Alan Olansky – Andrew Garrett

I just wanted to clarify one area of your operation, that’s the petroleum, and I wonder whether the decline in the price of oil is that something that could be a catalyst for your business? I had the feeling that when the price of oil was around $150 that perhaps the oil companies were not in a rush to look for enhance their businesses. What is your outlook for petroleum going forward?

Oded Bashan

Good morning Alan. This is Oded. For the meantime we don’t see but of course we believe it’s we’re becoming more advanced in the petroleum market and we expect to have a positive movement in the ’09, in the petroleum products.

Alan Olansky – Andrew Garrett

Can you somehow specify in which geographies this is likely to happen?

Oded Bashan

I’m talking not in Africa and one other geography already mentioned. Within Asia we expect to begin project but it’s more than it but oil will be ready and we’ll be able to announce it, we’ll let you know.

Operator

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

Excuse me, sir. Actually there is one last question. Would you be willing to take it?

Ohad Bashan

Of course.

Operator

Your next question comes from Stephen Silk – C. Silk and Sons.

Stephen Silk – C. Silk and Sons

Could you really talk about your competitive position in regard to the strength of your balance sheet, how fragmented the market is with your competitors or are you against stronger competitors? Do you foresee perhaps a shake out of some competitors or do you see consolidation among your competitors?

Ohad Bashan

I think that obviously right now I can talk mainly about OTI. Luckily for us, we were very conservative in the way we are treating cash. We have a strong and healthy balance sheet, which obviously makes our position superior to our competitors in certain markets that are suffering from less cash. They were less conservative I would say or less careful with their cash on hand.

It’s not something I can say generally but obviously specifically on certain markets, on the payment market we see that some competitors are having more difficulties as it relates to financing, as it relates to their operations, or downsizing, we see that. I’m sure there’s going to be some consolidation and I’m sure there’s going to be some shake outs. I’m sure that the economic situation right now, we will get out of it with different map in terms of suppliers and competitors.

We are very, very focused on OTI and as such we are confident that we will come stronger out of it.

Stephen Silk – C. Silk and Sons

The point of entry or the price of entry to duplicate what you’ve done, if the market picks up and your competitors are kind of weak I would assume that having new competitors come in probably would not be really something that would start popping up perhaps leaving the field more wide open for you?

Ohad Bashan

I think first in most of our products and places where we are operating, it’s – the barrier to entry is built from multiple factors. One, the significant learning curve in terms of knowledge, IP protection, patents, foothold in the marketplace that has a lot to do before you look at any cash investments or any capital investments to become a player in this market. This is something that you cannot overcome just with cash.

Further, when one looks at the barrier of entry, this is the place that you have to start with. It’s the IP, it’s the knowledge, it’s the know-how, it’s the learning curve, it’s the experience, it’s the [phase] experience and it’s the existing operations, existing customers, existing pipeline of projects that you have in hand. As I indicated, we are very, very focused right now looking inside OTI, looking at our existing customer base; looking at the good opportunities that we have in hand and the quality of opportunities, and focusing on them.

Focusing on getting to linear, more efficient, more economic operations on one hand and making sure we have excellent execution on the other hand, with our customers and I mean our good customers and good project. And you can see from the news releases that we’re putting out. We are shifting focus to high margin recurring revenues; we’re making sure that we are getting down the operating expenses that we’ve committed to; and we will continue to do so.

Stephen Silk – C. Silk and Sons

Just to switch gears, the legal fees, what did you say was the cost last quarter and is there an end in sight?

Ohad Bashan

The last quarter was not significant in terms of the legal fees. The legal fees this quarter have started to become significant as we’ve indicated in the last call; we are expecting the fourth quarter to have similar level of legal fees. These are extraordinary legal fees. It’s not something that will continue forever, but we have to go through this. OTI is confident in its product, technology, and IT. And we will protect it.

Ohad Bashan

Thank you all. If there’s no further questions, I’d like to thank you all for joining our call today and we’ll see you all in the next quarter.

Operator

Thank you. This concludes On Track Innovations Limited third quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.

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Source: On Track Innovations Ltd. Q3 2008 (Qtr End 9/30/2008) Earnings Call Transcript
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