On Track Innovations' (OTIV) CEO Ofer Tziperman on Q1 2014 Results - Earnings Call Transcript

May.14.14 | About: On Track (OTIV)

On Track Innovations Ltd. (NASDAQ:OTIV)

Q1 2014 Earnings Conference Call

May 14, 2014 10:30 ET

Executives

Dimitrios Angelis - Chairman

Ofer Tziperman - CEO

Shay Tomer - CFO

Analysts

Mike Latimore - Northland Capital Markets

Scott Turkel - Turkel Investments

Marc Silk - Silk Investment Advisors

Ed Schwartz - Schwartz Investments

Larry Schnurmacher - Morgan Stanley

Operator

Good morning. Welcome to OTI's First Quarter 2014 Conference Call. My name is Lera and I will be your operator this morning.

Joining us for today's presentation is the company's CEO, Ofer Tziperman and CFO, Shay Tomer, and Chairman of the Board, Dimitrios Angelis.

Following their remarks, we will open up the call for your questions then before we conclude today's call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call as well as information about use of the company's U.S. non-GAAP financial information.

I would like to remind everyone that this call will be recorded and made available for replay via link available in the Investor Relations section of the company's Web site at www.otiglobal.com.

Now, I would like to turn the call over to OTI's Chief Executive Officer, Mr. Ofer Tziperman. Sir, please proceed.

Ofer Tziperman

Thank you, and welcome everyone. Thank you for joining us today.

Our 43% growth during the first quarter was driven by continued strong demand for our NFC Readers in the U.S. and European markets. In fact, our industry leading technology and bolstered sales force were key drivers for surpassing the milestone of the sale of our 600,000 Saturn Readers unit sold since the products launch.

The quarter was also highlighted by key customer wins including an initial purchase order of 10,000 readers from major U.S. unattended point-of-sale system integrator. We also introduced our new smart vehicle tag called Moon Tag, which opens up the growing retail market for our fueling solutions.

Now, before I go further, I would like to turn the call over to Shay to take us through a more detailed discussion of our financial performance. Then I will return to talk about our operational activities and outlook for 2014. Afterward Dimitrios will provide an overview and update on our patent portfolio and monetization activities. Shay?

Shay Tomer

Thank you, Ofer. And welcome everyone.

Earlier this morning we issued the results of our first quarter of 2014 in a press release. A copy of which is available in the Investor Relations section of our Web site. In February, we closed an agreement to sell our wholly-owned German subsidiary Intercard System Electronics for purchase price of €700,000. Accordingly, the results from Intercard operations and cash flow for the reporting period are presented in the statement of operation and in the statement of the cash flows as discontinued operations separately from continuing operations.

Now to our financial results for the first quarter of 2014 ended March 31st. Revenues increased 43% to $5.2 million; the significant improvement was mainly driven by increasing our NFC Readers sales to the U.S. market.

Looking at our total revenue by source and the percent of total revenue; retail and mass transit revenue was $3.3 million, or 65%. Petroleum revenue was $700,000 or 13%. Parking revenue was $700,000 or 14%. And finally, MediSmart and Access Control products revenue was $500,000 or 9% of total revenue.

Breaking down Q1 revenue by geographic region and the portion of each regions contribution to total revenue. North America accounted for $2 million or 39%. Europe accounted for $1.8 million or 34%. Africa accounted for $1 million or 20%. And finally, Asia accounted for $400,000 or 7% of our total revenue.

Gross profit in the first quarter of 2014 increased 30% to $2.69 million. The increase was mainly due to the increased revenue compared to the same period last year.

Our operating expenses in Q1 2014 were $5.4 million compared to $4.2 million in the same year ago period. The increase was mainly due to higher sales and marketing expenses designed to accelerate the company's growth as well as increased patent-related expenses in connection with the company's patent monetization strategy.

Our net loss from continuing operation in Q1 2014 totaled $3 million or $0.09 per share. This compelled to a net loss from continuing operation of $2.8 million or $0.08 per share in the same period last year.

The year-over-year increase in net loss was mainly due to increase in the operating expenses partially offset by an increase in revenue and gross profit as I discussed before.

Adjusted EBITDA loss from continuing operations, a non-GAAP measure, which represents earnings before interest, income tax, depreciation and amortization and further eliminates the effect of share-based compensation expenses and patent litigation and maintenance expenses totaled $1.7 million in Q1 2014 and remained in the same level as the first quarter last year.

Now turning to the balance sheet. Cash, cash equivalents and short-term investments at March 31, 2014 totaled $14.1 million or $0.42 per common share.

This completes my financial summary. I would like to turn the call back over to Ofer to provide an overview of our operational activity and business outlook. Ofer?

Ofer Tziperman

Thank you, Shay.

As Shay indicated in his discussion about the contribution of revenues sources during the first quarter, we continued to build upon the momentum and traction we have established across all of our core business segments last year particularly with our cashless payment solutions NFC and contactless readers technologies.

In fact, we hit the ground running this year by securing a new initial order of 10,000 Saturn 6500 readers from a leading U.S.-based system integrator serving the unattended retail market.

We have since begun volume shipments of Saturn 6500 for distribution to build a nationwide customer base. This additional win represents another clear example of how our NFC readers meet the demanding needs of our global customers and partners.

Like with most of these opportunities a key determining factor in establishing this new relationship was our ability to quickly customize our Saturn Reader to meet unique specifications under a strict timeline.

Based on orders already shipped year-to-date, orders secured in our expanding pipeline of new business, we expect to increase our NFC Reader shipments by more than 35% to at least 150,000 units this year. We are very encouraged to see that more major vending and unattended machine operators are turning to OTI to supply them with our Saturn 6500 family of cashless payment readers.

We believe that the high-quality of our solutions, our dedicated service to our customers and our aggressive pricing strategy are beginning to pay off. We expect more important strategic customers to start sourcing their cashless payment readers from us this year. And from across different unattended payment market mainly North America and Europe.

We are very excited about opportunity for OTI in these fast growing markets, which has seen a 25% increase in average vending machine revenues once cashless payment methods have been installed and therefore not operating only with coins and bills.

For our WAVE product line, we began commercial shipments to our banking customer in Hong Kong. We see a growing interest in this new product line from banks, mass transit operators and large campuses. We also see a growing demand from financial institutions, who wish to take advantage of the WAVE's security DKI features. These features enhance the security level of the customers' online financial transaction across all connected devices. We are currently in business discussions and expect to close more deals with WAVE this year.

Now in our vehicle fueling segment, we continue to make meaningful progress across all of our geographical markets. This has been demonstrated by a growing number of OTI implementations, new contract wins and product launches not all of these new sources of revenues were reflected on the first quarter and they will contribute to the results later this year.

As I mentioned on our last call, in early Q1 we expanded EasyFuel into the consumer market with the introduction of an innovative new smart vehicle tag called Moon Tag. Moon Tag opens up the huge retail market opportunity. The initial market response and feedback has been encouraging with strong interest from the retail gas station market. With this vehicle fueling solution, we believe we can dramatically increase our market reach in this key segment which is why this represents an important growth engine for OTI.

Now, in terms of the industrial vehicle fueling side of our business, last month our wholly-owned subsidiary OTI PetroSmart was awarded a new 15 years contract from the government ministry in Southern Africa. The initial order is valued at about $550,000 and it will be recognized this year. Subsequent orders are possible during the life of the project.

OTI PetroSmart will deploy EasyFuel Plus to facilitate automated refueling at the ministries national network of more than 15 home-based sites and few thousand vehicles. This win reflects how adoption of EasyFuel Plus is gaining momentum across Southern Africa.

Our growing customer base includes prominent petroleum retailers, major commercial fleets and government agencies. Many of our longstanding customers will deploy our latest cable solution are now looking to upgrade to the new wireless EasyFuel Plus, which is more cost effective and scalable solution to implement and maintain.

We expect the strong sales efforts by OTI PetroSmart will result in additional major order through the year in our EasyFuel Plus line of business is becoming an increasingly important growth engine for OTI as it continues to gain adoption by major market leaders.

Now, our mass transit ticketing segment, we recently expanded the capabilities of 84 transit ticketing vending machines operated by our subsidiary ASEC for Mazovia Railway System in Poland. Over the last year, our automated ticketing network has enabled more than 62 million trips on the Mazovia Railway in Poland.

Integrated OTI NFC contactless card readers now allows travelers and commuters to easily use any NFC-enabled card or mobile device to recharge the prepaid phone calls issued by mobile network operators in Poland. This added convenience for ASEC ticketing customer represent another revenue stream from this ticketing terminal as well as potentially from other NFC-enabled vending applications.

Revenues generated from this new capability for refilling repaid phone cards are included in the estimated $4.7 million transaction fees revenues for the Mazovia Railway System over five years which we announced in April last year. We are working to expand our ASEC services in the current municipalities in Poland and are looking for opportunities in other countries for the service.

Now, turning to our parking segment. We are in final stages towards signing some new municipalities this quarter. We also expect to sign a new deal in a new country during this quarter. While the sales cycle is long in securing a new municipality, the advantage is that once the deal is signed, the contract is typically secured for a long-term. The feedback that we received from our new customers in the U.S. market is very encouraging and we invite you to visit the U.S. regional Web site at www.easyparkusa.com. We currently have about 160 municipalities using our parking services around the globe and we expect this number to grow by some additional 15 municipalities this year.

In our MediSmart business, OTI PetroSmart secured a follow-on order for 200,000 MediSmart calls from Smart a Kenya-based healthcare solution company that provides easy and secured access to healthcare services. For those unfamiliar with our MediSmart solution, it is an information management and claim submission system that incorporates contactless smart card and biometric technologies. The system validates the identity of the patient by using finger print biometric technology that cuts down on fraud and impersonation.

As Shay indicated earlier, while MediSmart represent a smaller percentage of total revenues, it has a high growth margin profile and provides a stable recurring revenue base and we expect more MediSmart orders to come in this year.

Now, I would like to turn the call over to OTI's Chairman and CEO of OTI America, Dimitrios Angelis to provide an update on our patent portfolio and monetization activities. I will then return to summarize and to share our financial expectations of this year. Dimitrios?

Dimitrios Angelis

Thank you, Ofer, and good morning everyone. It's a pleasure to have this opportunity to address everyone today.

We have continued to produce a healthy rate of new filings from our R&D initiatives focused on NFC and cashless payment solutions. During the first quarter, we were issued a new patent that enhances our innovations in the field of contactless smart cards. The new patent describes a multi-application contactless smart card system, a method that allows user to select an application using a unique switching mechanism located on the smart card.

For example, this innovation allows the accommodation of several application cards on the same physical card. Generally smart card supports a single application such as credit card. However, today's consumers typically carry a variety of credit and debit cards access control cards, public and transport payment cards. Carrying around these numerous cards can be cumbersome and our newly patented technology solves this problem by allowing one contactless smart card to support multiple users.

According to BCC Research smart card segments are expected to reach a 11.1 billion units or $7.3 billion in total sales by 2017. Smart card technology is a major driving force for the payment transaction market since it allows consumers to make secured payments. This rapid growth is being driven by a multitude of factors including mobile device proliferation new NFC standards, factor processing speed, increase security concerns and consumer demand for greater convenience.

The newly issued patent strengthens our growing presence in the contactless payment market where our payment solutions are already been certified by MasterCard, Visa and others. Through the patent system, we continue to create and protect the value of technology that has been developed by our world-class engineers. This patent supports our ongoing efforts to monetize our intellectual property through business operations, licensing and related arrangements.

We are currently looking for partners for this new patent. Along those lines, with regard to our lawsuit against T-Mobile USA, we are proceeding with the preparation toward a jury trial; discovery in the case is now over. We have submitted reply briefs for the summary judgment motions earlier this week and expect oral argument to take place in the next two months. We expect that court will make a decision by the end of the summer and the trial to be held in the fall.

On another note, our Board of Directors recently unanimously voted to terminate the company's shareholder rights plan also known as the poison pill. The prior senior management and its Board of Directors adopted a poison pill that should take an initiative to acquire a control of the company through the purchase of a significant percentage of the outstanding common shares as in a hostile take over. Plan was intended to ensure the implementation of OTI's business plan, which includes maximizing long-term value for its tangible and intangible assets for the benefit of shareholders.

While the intension of the shareholder rights plan is still towards priority given the tremendous progress we have made over the course of the last year, we believe the company has arrived at a stage in its development where there is less need for this protection and it would be more beneficial to shareholders to not have such a plan in place.

Further, we have also adopted a new governance policy that requires the company's Board of Directors which seek prior shareholder approval before reestablishing such a shareholder rights plan unless the Board determines that it would be in the best interest of our shareholders to adopt the plan without such approval. If a rights were adopted without prior shareholder approval, the plan must either be ratified by shareholder vote or would expire within 12 months.

We believe these measures places our shareholders in the best possible position to realize the full value of their stake in OTI and influence its destiny. And we believe it will also attract a greater universe of investors looking to participate in our positive outlook for growth and profitability.

This concludes my prepared remarks. I would like to now turn the call back over to Ofer. Ofer?

Ofer Tziperman

Thank you, Dimitrios.

In regard to the first quarter and our performance to-date, we believe we have arrived at an inflection point in terms of our growth and opportunity. Over the coming months we plan to build on this momentum and take advantage of the strong industry tailwind in the cashless payment space.

We plan to make continued consistent progress executing on our strategic plan focused on our core business of providing cashless payment solutions as well as monetizing our intellectual property.

Looking ahead, we are very excited about the progress across all business segments and we expect to increase revenues by at least 30% this year and achieve positive adjusted EBITDA on a quarterly basis by the end of Q1 2015. This is of course discounting any positive results from our patent monetization activities.

Now, with that we are ready to open the call for your questions. Operator, please provide appropriate instructions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. (Operator Instructions) And our first question comes from the line of Mike Latimore with Northland Capital. Please go ahead.

Mike Latimore - Northland Capital

Great. Thanks very much. I guess first just a question on the patent expense in the quarter, is that a good run rate, or how do you think about patent expense on a quarterly basis?

Shay Tomer

Hi, Mike. It's Shay here. Regarding the patent expenses in the next quarters, I think it will be – will fluctuate between the quarter, it actually depend on T-Mobile litigation timeline and other initiative.

Mike Latimore - Northland Capital

Okay. And in terms of the WAVE product, I mean, can you give us a general ballpark on the type of volume or unit volume you might see out of WAVE this year, is it hundreds, is it thousands, is it tens of thousands? Can you talk a little bit about just sort of WAVE trajectory?

Ofer Tziperman

Hi, Mike. It's Ofer. We are talking about the range of hundreds of thousands, some of which were still under negotiations. But we hope to close later this year.

Mike Latimore - Northland Capital

Again, I was thinking in -- so in terms of – seeing in terms of calendar year 2014…

Ofer Tziperman

Yes.

Mike Latimore - Northland Capital

So you are saying hundreds of thousands of units?

Ofer Tziperman

Yes. In the range of – the low range of few hundreds of thousands of WAVE devices this year.

Mike Latimore - Northland Capital

Okay. Got it. Then on the – just on the NFC, I would say that business is going well in terms of the NFC reader. At least in the U.S. there has been sort of fits and starts to mobile wallet and I think overall usage hasn't been that great for NFC. But fairly, the demand on POS side of thing is strong. So can you talk a little bit about that what's driving the demand for the readers here in the U.S.?

Ofer Tziperman

Actually the market right now in the U.S. seems very well-prepared for the adoption of NFC Readers. And we cannot argue with the growing demand that we see from our major customers in the U.S. The main reason for that first of all is the increasing revenues of about almost 30% for vending machines that this equipped with cashless reader in comparison to a vending machine which is only accepting bills and coins. Not to mention the extra expenses required when you need to collect on this cash. And there is something like 25% increase in the number of transactions that you would see with vending machine equipped with cashless payment reader.

So that's the first motivation. The other one is the liability shift mandate imposed by Visa, MasterCard and the rest of the card associations when they actually say that by October 2015 actually a year-and-a-half from now all merchants should be ready to accept smart card transactions including NFC or they will bear any liability of fraud. So a merchant can still use a magnetic stripe-based credit card but if anything like what happened to a Target few months ago will happen then the liability is going to be on the merchant.

So this is definitely driving the market very strongly towards adopting EMV standards meaning smart cards in all forms and NFC transactions.

Mike Latimore - Northland Capital

Great. And then just last question, the gross margin in the quarter was solid, is that a good way to think about gross margin for the year as well, or do you see it improving or degrading a little bit?

Shay Tomer

Although we are working, always been trying to improve our margin, I think the 50% is possible for the rest of this year.

Mike Latimore - Northland Capital

Okay. Great. Thank you.

Ofer Tziperman

Thank you.

Operator

Thank you. And our next question comes from the line of Scott Turkel with Turkel Investments. Please go ahead.

Scott Turkel - Turkel Investments

Hi. Can you discuss the date set for the T-Mobile trial?

Ofer Tziperman

Dimitrios, would you like to refer to that?

Dimitrios Angelis

Your question was, is there a date set for the T-Mobile trial?

Scott Turkel - Turkel Investments

That's correct.

Dimitrios Angelis

Yes. There has not been one yet. We are forecasting the fall for that.

Scott Turkel - Turkel Investments

Thank you very much.

Dimitrios Angelis

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Marc Silk with Silk Investment Advisors. Please go ahead.

Marc Silk - Silk Investment Advisors

Hi, Ofer. Thanks for taking my questions. So in Monday's New York Times, there was a start-up company called I think it was called – what is it called, I guess Bundle. So it's interesting, its focuses only on vending machines using a mobile app. I find this encouraging that a start-up is focusing only on vending machines. They also mentioned in the article that older vending machines are being retrofitted with hardware. So I want to get my arms around how vast the vending machine business can be, so you can expand on this topic and how it relates to OTI?

Ofer Tziperman

Yes. Hi, Marc. I think that's actually very interesting development because as we see vending machines are going to support different type of payment methods. And in fact, our readers are also supporting new versions that are coming now are also supporting the multiple type of payment methods. So we assume that the vending machine will accept a regular magnetic stripe cards, NFC cards and phones, Bluetooth Low Energy or BLE technology as well as mobile payments that are going to use key wire codes.

And we are gearing up to support all of these payment methods because eventually it's about user experience. I think that it's also about the level of security of the payment method as will be accepted by the vending machines operators. So I think that we are going to see several type of payment methods and as far as OTI is concerned we are going to be involved in all of them.

Marc Silk - Silk Investment Advisors

Okay. On petroleum, it looks like you are making progress in that area. So can you – I know you talked about in the call, but can you elaborate on your strategy, can the 15-year government ministry contract and Africa be replicated in other countries, also I would like to know some feedbacks from some of your partners like Tokheim and what we should be looking forward in 2015 and beyond in regards to petroleum?

Ofer Tziperman

Okay. So the business on the petroleum goes into two main areas, one is the commercial fleet and the other one is the retail market with private consumers. So the majority of the business right now is driven by the commercial fleet. This deal in Southern Africa is a very good example of that actually this government ministries, yet another fleet owner if you wish, and we do see a growing number of such fleets and organization actually from around the world that are now joining the solution.

With regard to the relationship with Tokheim and Wayne, they are definitely a great channel partners. The last year was devoted mainly for training those sales force from around the world. We have participated in few training sessions in different parts of the world training this global channel partners. And right now we see -- finally these types of relationships are starting to yield concrete results.

So this is why we are very optimistic about that. Obviously, there is a sales cycle that needs to go through even for this channel partners. But, we need to remember that each and every one of them is serving tens of thousands of gas stations around the world. So the fact that they have incorporated the OTI petroleum solution is OEM within those solutions is a great sales tool from our point of view. So we expect those sales to become fruitful towards the end of this year and mainly in 2015.

Marc Silk - Silk Investment Advisors

Thanks. Dimitrios, I got a few questions for you. So on the press release, you get some bullet points here, I just want you to expand that a little bit. So one of them you said the U.S. district court or the southern district in New York approved OTI's motion to amend it's complain against T-Mobile to add indirect infringement of OTI's U.S. patent 043. Can you kind of explain that a little bit, I'm not a lawyer, and I don't play on TV, so it would be helpful?

Dimitrios Angelis

Okay. Thanks Marc. So that's difficult to get into a lot of detail suffice to say that it expands the damages that we can ask for a trial. I don't mean to be evasive or irate, but I can't get into too much more specifics on that. But, it is good news for OTI.

Marc Silk - Silk Investment Advisors

I understand it's an ongoing trial. So that's fine. And then the other thing, so could you also expand, you issued a new patent title towards application contactless smart card.

Dimitrios Angelis

Yes.

Marc Silk - Silk Investment Advisors

Can you comment on that as well just a few clarifications?

Dimitrios Angelis

Sure. Sure. It's an exciting patent. And we are actively looking to see how to market it. We are looking for partners. It's a patent that allows the user to combine multiple smart cards into one device. It allows for the smart card to have a mechanical switch that allows you to switch between cards. And its got some uses that we think are going to be very helpful for consumers and especially everything that we have been talking about with the shift going to – liability shift and everybody is using smart cards in the very near future.

So it's a patent that we are – we think will be something that could be very helpful to consumers. So we are currently looking to either develop it ourselves, or to partner with someone who might be interested and helpful to take it forward.

Marc Silk - Silk Investment Advisors

So this appears to be on this patent, this is completely different as far as strategy wise in a T-Mobile that is like you know what, we have something here, let's go see if we can get some partners and maybe monetize this thing without having to go through the courses and all that.

Dimitrios Angelis

So I would say that our goal is to monetize the patents in anyway we can, I wouldn't take that off of the table as an option for us. But I certainly would prefer to partner with someone and grow the revenue and the business that way. But, unfortunately with litigation serve its purpose – in the event that there is alleged infringing.

Marc Silk - Silk Investment Advisors

Okay. That clarifies. Thanks Dimitrios. Good luck guys.

Dimitrios Angelis

Thank you, Marc.

Ofer Tziperman

Thank you.

Marc Silk - Silk Investment Advisors

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Ed Schwartz with Schwartz Investments. Please go ahead.

Ed Schwartz - Schwartz Investments

Good morning, Ofer. Good morning Dimitrios.

Dimitrios Angelis

Hi, Ed.

Ed Schwartz - Schwartz Investments

I wonder if On Track shareholders asked me to ask a question, so my first question is from this person and it's not my question. It seems – this lady wrote to me, it seems that NFC might have been a great idea at one time, but security issues and failure for broad implementation have kept it on the ground. What is the OTI's strategy if NFC is come and gone before it took off?

Ofer Tziperman

Well, I must say that I would not agree with this statement actually. As I mentioned before NFC is actually gaining more momentum recently with growing numbers of NFC SIM card that are being delivered in the market. And in addition, we can say as I have also outlined before that both Visa and MasterCard have announced in February actually they support for NFC host-card emulation or was it known as HC, which is a new standard that aims to simplify the NFC implementation.

So this is already supported by Google and other players for example like PayPal. And PayPal also recently announced that they are going to be reconsidering their strategy with regard to NFC given this development.

So that's on one point, as far as the question regarding the security, this is definitely must be noted that NFC is actually the most secured cashless payment solution available today even more than the emerging Bluetooth low energy, BLE.

And it should also be noted that NFC is actually the only relevant payment solution when it comes to a fast transaction. And just by a way of example, we can use mass transit or other transactions that requires the actual presence of the users by the attended payment reader. So from all of these reasons and from actual facts NFC is actually only gaining more momentum as we go.

Ed Schwartz - Schwartz Investments

Okay. Thank you. Now, I will get to my questions. First of, when do you expect to receive additional payments from SuperCom?

Ofer Tziperman

According to the agreement with SuperCom, we expect to actually receive additional 7.5 million and this additional payment timing is actually comprised of either certain quarterly payments over several years or certain performance based milestones. But, we believe that we should start seeing those payments this year.

Ed Schwartz - Schwartz Investments

Okay. Thank you. As a long time shareholder, I and I know a lot of other people been waiting for a long time, we can wait a little bit longer. But, do you have a plan that is going to make us profitable, and if so, how confident are you of that plan and can we as shareholders expect you to get there?

Ofer Tziperman

Well, as you could have heard before we gave guidance after the first year of turnaround that means that we now feel comfortable that we have a very good visibility into the market, into our main customers that can allow us to come out with this statement. So we currently believe that we are going to keep it.

Ed Schwartz - Schwartz Investments

Okay. Have you pinpointed exactly where the budgets need to be cut or reduced to help you to get to profitability?

Ofer Tziperman

Well, excuse me; was the question about the sales force?

Ed Schwartz - Schwartz Investments

No. Have you pin – let me repeat it a little slower. Have you pinpointed exactly where the budget needs to be cut or reduced to help you to get to profitability?

Ofer Tziperman

Yes. So actually what we have done so far and we have already took several measures to cut costs, some of it is on the operational structure. For example the way that we are all working in front of our subcontractors that was the first element that we have achieved significant cost reduction in our ongoing running cost. Second, is the headcount, during the last year, we reduced the headcount from something like 270 employees down to about 165 employees, this is almost 40% reduction. And we also reduced some of the other aspect in terms of our R&D activities.

In addition to that, I must note that one thing that we did not reduce but rather increase is the number of sales people because eventually we want to support growth and all of the cost reductions that we have made was with one goal in our mind to make sure that there not going to interfere with supporting this growth.

Ed Schwartz - Schwartz Investments

Okay. And as you go over the – go through the next three quarters and reduce more costs, will it be any charges to earnings?

Ofer Tziperman

Will be any charges for what?

Ed Schwartz - Schwartz Investments

Will it be any charges to earnings?

Ofer Tziperman

I'm not sure that I followed your question. Will you please rephrase it?

Ed Schwartz - Schwartz Investments

Sometimes when companies reduce their costs, there is cost associated with that. So I'm asking you, will there be any cost associated with your cost reduction program?

Ofer Tziperman

I see. Yes, obviously, for example if we are closing down subsidiaries or doing anything like reducing headcount. In some of these cases, it has some costs associated immediately with such reduction. But we don't see any major such costs that are not foreseen when we are starting this process. So it is all within our plans towards profitability as I have noted them before.

Ed Schwartz - Schwartz Investments

Okay. Well, I thank you for taking my questions. And good luck.

Dimitrios Angelis

Hey, Ed. This is Dimitrios. Ofer, with your permission can just further add to those something that you said?

Ofer Tziperman

Sure.

Dimitrios Angelis

I just want to speak on behalf of the Board of Directors in telling everyone that we are completely aligned with making this company profitable. I think there is not an employee you could speak to who would not agree that profitability is at the top of all of our lists. It's something that we look at with every expenditure and every opportunity. And we weigh it against the opportunity to come to fruition.

So this is, obviously, a constant thought for Ofer, Shay and myself, but I would go so far to say that employees are aligned with us. And we are all, our sleeves are rolled up and we are focused on that. We want us to be successful and we are very optimistic.

Ed Schwartz - Schwartz Investments

Appreciate it, Dimitrios. Best of Luck.

Dimitrios Angelis

Thank you. Thank you.

Operator

Thank you. Our next question comes from the line of Isaac (indiscernible) who is a private investor. Please go ahead.

Unidentified Analyst

Hi. Yes. A lot of questions were asked about the court case against T-Mobile. Can you elaborate and give us more color? If possible I know that you have some hesitation there, but whatever you can please let us know.

Dimitrios Angelis

I will do the best I can. So as I mentioned earlier, we are expecting the results of the summary judgment here in the upcoming future. I would say for those of you watching the outcome of this case that the results of that will be an inflection point and will be telling of how we will proceed.

I think summary judgment for those of you who might not understand is the time when the judge decides what goes to the jury, what doesn't go to the jury and possibly if the case ends there. So any trial lawyer will tell you that the results of a summary judgment will be very telling of what the future – what the future holds.

So we remain optimistic, I don't have a crystal ball, I can't really tell you much more than that.

Unidentified Analyst

Okay. Thank you very much for your help.

Dimitrios Angelis

Pleasure. Thank you.

Operator

Thank you. And we have a follow up question from Mike Latimore with Northland Capital. Please go ahead.

Mike Latimore - Northland Capital

Hey. Great thanks. I guess just on the cards front, is your thought that you will trim more cost out of the model or just hold more from your end and get the profitability to revenue growth?

Shay Tomer

I think it will be both but our current level of expenses can support much higher level of revenues. And we believe the profitability will come from both sides increasing revenues and accelerated growth. And also monitoring our expenses and to cut the cost wherever we can.

Mike Latimore - Northland Capital

Okay. And then in terms of the reader growth you expect this year, does most of the growth coming from current customer expanding or you counting on winning some new account as well?

Ofer Tziperman

We are also accounting on securing new major customers.

Mike Latimore - Northland Capital

Okay. And the average selling price for readers, have you seen that change at all?

Ofer Tziperman

Actually it's the same like it is to be before. As I have mentioned earlier, we took a strategy of coming to the market with an aggressive pricing that's part of the reason that we are winning some customers over the competitors. And so we are going to fill to maintain this strategy moving forward.

Mike Latimore - Northland Capital

Just last question. Some of the vending company's are getting into the micro market; do you see growth coming out of the micro market segment?

Ofer Tziperman

Not too much at this point in time, I must say.

Mike Latimore - Northland Capital

Okay. Thank you.

Ofer Tziperman

Thank you.

Operator

Thank you. Our next question comes from the line of Mike Davies who is a private investor. Please go ahead.

Unidentified Analyst

Hey, how are you? What haven't you said that may see guys so confident about the NFC market?

Ofer Tziperman

What's the question? Why do we feel so confident?

Unidentified Analyst

Right. What – I mean you are one of the pioneers as far as all the technology is concerned, is that fair to say?

Ofer Tziperman

Yes. That's correct.

Unidentified Analyst

So is it all so fair to say then that what's the next wave of NFC?

Ofer Tziperman

Well, you know, I think one of the major developments that happened in the last few years is this host-card emulation. Without being too technical, one of the elements in NFC is the high-security driven by what is called a secure element. Typically, so far secure element was a hardware component embedded either on the phone or on the SIM card. And what happened in the last year is that a new technology called host-card emulation was introduced and already implemented by Google, which allows to take this secure element to the cloud, which simplifies to a great extent some of the NFC implementations.

Now, obviously, still the most secured of these – with regard to physical secure element, that it should be noted that this is a risk management issue and ones both Visa and MasterCard declared last February that they are supporting this host-card emulation that gave a significant boost to the industry. And the fact that Google already supports that the fact PayPal is now reconsidering positively their approach towards NFC. All of those are very strong tailwind for this industry.

There are rumors about Apple, but Apple like usually you can never tell until they are going to release the next phone and next very little gadgets. But it looks like there are no other technologies that can replace NFC for certain type of application. And I think that it came to be a mature technology after – over a decade of progression by the industry. So any unreformed right now is NFC enabled, so this is really becoming a critical mass.

Unidentified Analyst

Okay. Great. One last question regarding the – you removed the poison pill now, have you been approached by other companies for possible buyouts or that hasn't happened yet? Are you expecting that sometime in the future now?

Ofer Tziperman

Dimitrios, would you like to refer to that?

Dimitrios Angelis

Certainly. So we are little complacent until not for that reason, we removed the poison pill to increase transparency and to be completely aligned with our shareholders. These plans have had a long history. And some times when Boards implement them they look to entrench themselves. We would rather be more open and open to what the market brings and we are actively looking for anything what we want to be aligned with our shareholders. And that's the beginning and the end of the motivation for us.

Unidentified Analyst

With the market capital of about $80 million or so, which is kind of small as you realize, I have to believe that you would think that you are NFC patents by themselves worth significantly more money than where the company is valued today. Does everyone have that same assessment on management?

Ofer Tziperman

I would say that we are not taking any position so far as – as far as the patent monetization and numbers and valuations. So I'm afraid we cannot refer to this specific question.

Dimitrios Angelis

It's also tied to our litigation. So we really can't comment for that as well.

Unidentified Analyst

Okay. And last question if Apple finally does go NFC way, don't in a sense they need to use your IP for that or is there a way around that?

Ofer Tziperman

Again, on this question, we don't want to comment before we see, if they are implementing it and how exactly it would be irresponsible at this point.

Unidentified Analyst

Okay. But in layman terms, is there another way around your patents to do NFC? It's just a informative question that I would imagine many people would like to know this.

Ofer Tziperman

Yes. Sure. Again, as far as anything which is connected to the trial, as you can understand all of these issues are on the table – on the litigation. So we are forbidden from making any comment on that.

Unidentified Analyst

Right. But, I'm not talking about T-Mobile, I'm talking about if anyone is, can use NFC technology, how about another company that you are not in trial with? Are they using your patents that?

Ofer Tziperman

Our patent is very specific to certain issue of using both contact and contactless interfaces on the same device. And anything that infringes on that falls within our patent monetization. And so other than I cannot comment any further.

Unidentified Analyst

Okay. All right. I appreciate that. Thank you very much for your help.

Dimitrios Angelis

Thank you.

Operator

Thank you. And our final question comes from the line of Larry Schnurmacher with Morgan Stanley. Please go ahead.

Larry Schnurmacher - Morgan Stanley

Yes. Hi. It's back to this Apple NFC story because there seems to be a bunch of news around about that they are going forward, they are testing it and what have you. But, I guess you guys have kind of answered that good luck. I hope you get it.

Dimitrios Angelis

Thank you.

Ofer Tziperman

Thank you very much.

Operator

Thank you. At this time this concludes our question-and-answer session. I would now like to turn the call back over to Ofer Tziperman for closing remarks.

Ofer Tziperman

Thank you, everyone for joining us on our call today. I especially want to thank our investors for their continued support and patience as we continue to build OTI into a global leader in cashless payment solutions.

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

Operator

Before we conclude, I would like to provide OTI's Safe Harbor statement with important cautions regarding forward-looking statements made during this call as follows as well as the statements regarding use of non-GAAP financial information. All statements made by management during this call that are not based on historical facts are forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and the provisions of Section 27-A of the Securities Act of 1933 as amended and Section 21-E of the Securities Exchange Act of 1934 as amended.

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 certain risks and uncertainties and actual performance or achievements of OTI could differ materially from those described in or implied by those statements on this call.

For example, forward-looking statements include statements regarding the successful implementation of our new strategic plan of refocusing on our core business and cashless payment technology, future reduction of operating expenses, expansion of our sales team, demand and shipment of NFC solutions and future pipeline and growth opportunities in the U.S., Europe or elsewhere; future expansion of our markets, or our share within them. Increase of future revenues and/or achieving sustainable profitability in the future if any. The future of the strategic agreement we enter into with Wayne and similar agreements with other parties.

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-K for the year ended December 31, 2013 and in subsequent filings with the Securities and Exchange Commission.

Although we believe that 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 speaks only as the date hereof, whether as a result of new information, future events or circumstances, or otherwise.

This call contains certain non-GAAP measurements, namely adjusted EBITDA from continuing operations. Adjusted EBITDA from continuing operations represents earnings before interest, income tax, depreciation and amortization, and further eliminates the effect of share based compensation expense.

The company believes that adjusted EBITDA from continuing operation should be considered in evaluating the company's operations, since they provide a clear indication of the company's operating results. This measure should be considered in addition to results prepared in accordance with the U.S. GAAP. It should not be considered as substitutes for the U.S. GAAP results. The non-GAAP measures included in this call have been reconciled to the U.S. GAAP results and tables in the press release issued earlier today.

Finally, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investor Relations section of the company's Web site at www.otiglobal.com.

Thank you for joining us today for our presentation. You may now disconnect.

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