On Track Innovations' (OTIV) CEO Shlomi Cohen on Q4 2016 Results - Earnings Call Transcript

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On Track Innovations Ltd. (NASDAQ:OTIV) Q4 2016 Earnings Conference Call March 22, 2017 9:00 AM ET

Executives

Shlomi Cohen - CEO

Yishay Curelaru - CFO

Tamir Ben-Yoseph - General Counsel

Analysts

Josh Elving - Feltl and Company

Brian Kinstlinger - Maxim Group

Edward Schwartz - Schwartz Investments

Nick Goldman - Northland Capital Management

Mike Vermut - Newland Capital

Kevin Dede - Rodman & Renshaw

Operator

Good morning, and welcome to OTI's Fourth Quarter and Full Year 2016 Conference Call. My name is Shannon, and I'll be your operator this morning.

Joining us today is the company's CEO, Shlomi Cohen; CFO, Yishay Curelaru; and General Counsel, Tamir Ben-Yoseph. Following presentations by Shlomi and Yishay, we will open the call to questions.

Please be advised that certain information discussed on this conference call will contain forward-looking statements. They can be identified by the use of terms such as may, will, expect, believe, intent, plan and other comparable terms. For example, forward-looking statements include statements regarding our expected adjusted EBITDA for 2017, our expectations regarding the pipeline and opportunities in Japan, Europe, and North America, and growth opportunities for new and existing products and verticals.

While forward-looking statements reflect good faith, belief and best judgment based upon current information they are not guarantees of future performance. They are subject to known and unknown uncertainties and risk factors, including those detailed from time to time in the company's periodic reports and registration statements filed with the SEC. OTI assumes no obligation to update any forward looking statements or information which speak as of their respective dates. The full Safe Harbor Provisions are set forth in the earnings release we issued this morning.

Today's presentation also includes various non-GAAP financial measures, the disclosures related to these non-GAAP measures include reconciliations to the most directly comparable GAAP financial measures are included in the company's earnings press release, which appears in the Investor Relations section of its Web site. I would like to remind everyone that this call will be recorded, and will be made available for replay via a link available in the Investor Relations section of the company's Web site www.otiglobal.com.

Now, I would like to turn the call over to OTI's CEO, Shlomi Cohen. Shlomi, please proceed.

Shlomi Cohen

Good morning, everyone. Thank you for joining us today to discuss our results for the fourth quarter and fiscal year ended December 31, 2016.

As you can see from the earning release we issued this morning, I'm very proud to present the fifth quarter in a row of improvement in nearly all aspect of our results, as well as significant improvement in our year-over-year results. Our financial results for 2016 were strong across the board. We increased our revenues by more than 11%, maintained our gross margins level, reduced our debt by 10%, and dramatically decreased our net losses by 88%, and our adjusted EBITDA losses by 93%. This is a remarkable achievement, as it was accomplished in a year in which our primary focus was on restructuring, on establishing and maintaining operational efficiency.

We strongly believe that during 2017 we will present a positive adjusted EBITDA. Before I discuss our other achievements during '16 and our expectation for '17, I would like to turn the call over to Yishay, our CFO, for his detailed report on our financial results. Yishay, please.

Yishay Curelaru

Thank you, Shlomi, and good morning everyone. Before the market opened today, we issued the results for our fourth quarter and fiscal year ended December 31, 2016 in a press release. A copy of the release is available in the Investor Relations section of our Web site.

As we reported in the press release, our total revenues for the fourth quarter increased 3% to $5.6 million, from %5.4 million in Q4, 2015. This increase was primarily due to an increase in sales of readers to the U.S. market. If we exclude the amounts received for intellectual property rights in Q4, 2015, the increase quarter-over-quarter is more than 30%. For the full year, total revenues increased 11%, to $20.6 million, from $18.5 million last year. The increase was primarily due to an increase in sales of [indiscernible] to the U.S. market, and an increase in sale of our otiMetry solution in the European market.

As a reminder, the past revenues and other results reported today reflect the shifting of results from our parking business to discontinued operations following the completion of the sales of a business in the third quarter of 2016. Now, breaking down Q4 revenues by source and their percent of total revenues; retail and mass transit ticketing revenues was $4.5 million or 73%. Petroleum revenues was $1.1 million or 20%, and MediSmart and access control product revenue was $360,000, or 7%.

Now, breaking down our revenues for the full year of 2016 by source and their percent of total revenue; retail and mass transit ticketing revenues was $14.1 million or 69%, petroleum revenues was $4.1 million or 20%, and MediSmart and access control product revenues was $2.3 million or 11%. Gross profit for the fourth quarter of 2016 decreased 11% to $2.4 million or 43% of revenues compared to $2.7 million or 50% of revenues in Q4, 2015.

The decrease in gross margin was mainly attributed to year-end inventory adjustment and a change in our revenue mix. For the full year, gross profit increased 10% to $10.2 million or 50% of revenue, compared to $9.3 million or 50% of revenue in 2015.

Turning to our expenses, for the fourth quarter of 2016 operating expenses decreased 10% to $3.4 million from $3.7 million in the same year ago period. For the full year operating expenses decreased $4 million or 25% to $12.1 million from $16.1 million last year. The significant improvement was primarily due to the cost reduction measure we implemented in 2016.

Operating expenses for 2016 marked the lowest level for OTI in more than three years. Our net loss from continued operation for the full-year totaled $2.4 million or $0.06 per share. This was a significant improvement from a net loss from continued operation of $7.5 million or $0.18 per share in 2015.

Turning to our non-GAAP results, we've adjusted EBITDA from continued operation, a non-GAAP metric, as we believe it provides a clear indication of our operating results. In 2016, our adjusted EBITDA loss improved our three-year record of $241,000 from a loss of $3.4 million in 2015. The improvement came from both higher revenues and a significant reduction in our operating expenses. Please reference to the earning release for further details about this non-GAAP metric, including reconciliation of adjusted EBITDA to our comparable GAAP results.

Now turning to the balance sheet; cash and cash equivalents and short-term investment at year-end totaled $11.5 million, which was up 6% from the end of prior year. This completes my financial summary. For more detailed analysis of our financial results, please refer to our Form 10Q, which we plan to file by March 31, 2017.

I would like to turn the call back to Shlomi for additional comments on out operational progress and outlook for 2017. Shlomi?

Shlomi Cohen

Thank you, Yishay. As you heard from Yishay, we were able to maintain our positive momentum, and we are pleased to report a fifth consecutive quarter of improvement in our results. And more importantly, we were able to deliver significant improvement in our annual results.

The year-over-year improvements are very meaningful to us as they demonstrate how far we have came - come over the last 18 months in our work to put OTI on a path towards consistent profitability growth.

As a result of our significant efforts to reduce cost, optimize our operations, focus our product offering and increase our sales, we are able to deliver over 90% improvement in adjusted EBITDA flows from 2015 in which new breakeven adjusted EBTIDA for the full year.

We have also made significant improvement on the product sale and operational front. Possibly the most notable and promising progress came in Japan, following on our receipt of FeliCa certification for our rebuild, we received in late '16 a letter of intent for major Japanese retailer to purchase 10,000 otiMetry system consisting of our FeliCa certified reader and our GoBox Multi-Service Telemetry Gateway during the coming three years.

This letter of intent was followed by a formal purchase order in early 2017. We see this as a great progress into a very promising market. As a result of our continuing work to develop sales pipeline in the Japanese market together with our partner, Billing Systems, we believe that this market will deliver additional opportunities in the months and year to come.

2016 was also very productive on the product front as we got off to a strong start in transitioning from being a simple hardware supplier to a full solution provider offering vending operators and other partners, a one-stop-shop for their payment solutions and services. In Europe, we have seen growth in the deployment of our otiMetry solutions, which allow us to generate recurring revenue in addition to the revenue associated with the product sales.

Turning to North America, I will first address the topic of the company's litigation with U.S. safety and Masterwork. As we reported earlier this month USA gives five lawsuits against OTI claiming that the OTI readers that were sold by OTI to USA, it is subcontractor Masterwork Electronics were not confirming because they did not include the value-added services or VAS feature of Apple Pay.

We don't believe this claim has any merit. VAS was never promised to U.S. safety, while it was also not specified in the scope of the purchase order issuing by Masterwork. Not only we will be aggressive in our defense of these lawsuits, but we have also initiated a lawsuit of our own against Masterwork to protect our rights, the payments from Masterwork for a product that we have believed in.

This situation puts greater emphasis and importance on expanding and diversifying our customer base both globally in places such as Japan and Europe and in North America where we have successfully positioned OTI and our products for entry into the growing kiosk or self-checkout market. Through our work with North American channel partners, earlier this year we received several purchase orders for the supply of thousands of advanced self-checkout payment system, to leading U.S. based kiosk operators and fast food chain. We believe that these first purchase orders are only the beginning of OTI's entry into this key vertical and we believe that during the coming year we will see continued acceleration and sales to this market.

We have also made progress in our wearable business. Following the launch in May 16 of Pay Capsule Flex payment enabler inserts and our Pay Enabled platform. In November we displayed a smart payment ring utilizing our technology. This demonstrates our ability to turn any product and fashion garment into a payment device. With our wearable cashless payments technology successfully demonstrated, we have increased our business development and sales efforts for our Pay Enabled products and we believe that these efforts will yield results.

And with that, we are now ready to open the floor for your questions. Operator, please provide appropriate instructions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question is from Josh Elving with Feltl and Company. You may begin.

Josh Elving

Hi, good morning guys.

Shlomi Cohen

Good morning.

Josh Elving

I had a couple of questions. One, I was trying to get -- I know you, Yishay commented on the gross margin briefly, and I think I might have missed some of that, I just was trying to get little bit of more color there as to what was the main impact on the gross margin in the quarter, and maybe you could talk a little bit about your expectations for gross margin going forward?

Yishay Curelaru

Okay. So, first, as I mentioned in my presentation, the first issue is regarding revenue mix [ph] change, if you remember, last quarter of 2016, we reported the intellectual property rights betterment [ph] to reach…

Josh Elving

Right.

Yishay Curelaru

It wasn't better in this quarter end. And other revenue mix products, so -- the next thing is year-end inventory adjustment, including inventory accounts, and also that inventory adjustment as we did this year-end; just to clear off the table as it fits for a new year.

Josh Elving

So, if I assume about a 100% margin on license and transaction fees or close to that, that kind of back into gross margin on hardware of around kind of low 30%. And so, really that difference or that number being closer to 25% in the fourth quarter, just had more to do with inventory adjustments, is that correct?

Yishay Curelaru

As you know, we don't give any guidance as to our gross margin, but we can assume an improved gross margin as we advance in 2017.

Josh Elving

Okay, but the fourth quarter gross margin on equipment was lower, because of the inventory adjustment?

Yishay Curelaru

That's correct.

Shlomi Cohen

That's correct.

Josh Elving

Okay, and did that have anything to do with the litigation with USAT?

Shlomi Cohen

Nothing.

Yishay Curelaru

No, no, none at all.

Josh Elving

Okay, and looking at the balance sheet, the receivables picking up, does that have to deal with that lawsuit currently?

Shlomi Cohen

That was has to deal with our sales over the years, and mostly of our sales in the fourth quarter, which in part relates to the lawsuit.

Josh Elving

Okay. That's helpful, thank you. Can you -- so, I know you talk a lot about your optimism for Japan, can you talk about you know, when we -- like, what your expectations are for over the course of this year, when you might expect to see additional orders, you know, obviously the opportunity is massive, but what could that opportunity be for you? Is it potentially hundreds of thousands of connections over the next couple of years? Can you maybe talk about the size of your opportunity? And in addition, when we might see our next few orders?

Shlomi Cohen

Okay. Josh, as you know, constantly we are not giving any guidance regarding the future, but I will say the following; we're now -- and since beginning of last year, we are working intensively in the Japanese markets and fortunately the first fuel came. And in parallel to this account, we are working on several different major accounts in the Japanese market. And as I mentioned during -- I mentioned earlier, we are expecting to accelerate the business in the Japanese markets. This is the only thing that I can say at the moment, and I believe that, you know, in the coming quarter we will see results.

Josh Elving

In the coming quarter, did you say?

Shlomi Cohen

In the coming quarters.

Josh Elving

In the coming quarters, okay. And by the way, congratulations, I do think that was a significant first purchase order out of Japan. I have more questions; I will get back in queue. Thank you.

Operator

Thank you. Our next question is from Brian Kinstlinger with Maxim Group. Please proceed.

Brian Kinstlinger

Hi, great. Congratulations, Shlomi, you have really turned this company around in the last 18 months. Now this restructuring is complete, can you talk about capital allocation, your different businesses, and any changes you are making to drive accelerated top line growth? And where do you see most of the growth coming over the next three to five years of your two businesses?

Shlomi Cohen

Okay. Basically since last year, we are actually working on several verticals and new markets. I mentioned already Japan, but it's not only Japan, it's also Europe, also there we are doing a significant progress, and also there by the way, most of our revenue is going to be based -- and total be based on recurring revenue, and definitely on providing solutions, but on top of that, we definitely can mention the self-checkout system market that early this year we have been able to get significant purchase order for one of the fast food chain in North America. And top of that, we are expecting also to see a significant growth also on the ATM vertical for the banks. So, ACN self-checkout system in Japan and Europe, they are actually the main growth engine that we are having in the coming years. On top of the fact that we are very strong on the vending market as well. I'm not mentioning at this point of time the IoT, because the IoT is a game-changer for us, and we are still working in order to develop few major accounts that we having since we developed the flex that this is actually the core technology. This is a total game-changer, and I'm very positive regarding this.

Brian Kinstlinger

Great. And then, are you going to provide any detail on timing of the ramp of those 10,000 systems order in Japan? I mean, I was confused maybe you had mentioned it when -- how that's going to ramp over time?

Shlomi Cohen

We do specific accounts, at the moment at least we are speaking on contract for fields, and this is what the beginning for '17, and the idea is to implement 3,000 systems every year for the next two years. That's the basic contract that we are having with these retailers. And this is only one account.

Brian Kinstlinger

And what's the -- have you provided or can you provide the monthly subscription per machine?

Shlomi Cohen

Not at this point of time, but hopefully later this year we will be able to speak about it as well.

Brian Kinstlinger

But should we assume with 10,000 orders, there should be a modest discount, or is pricing not discounted on large orders?

Shlomi Cohen

No, no. Basically the business model although there, but we are setting a full solution plus we're going to generate recurring revenue from each one of those systems that are going to be installed.

Brian Kinstlinger

Great. Thank you so much for your time.

Shlomi Cohen

Thank you.

Operator

Thank you. Our next question comes from Edward Schwartz with Schwartz Investments. Please proceed.

Edward Schwartz

Good morning, Shlomi.

Shlomi Cohen

Good morning.

Edward Schwartz

In Q3, your net loss -- of Q3 2016, your net loss was like -- I had it in front of me, it was very small, and it seemed to have increased in Q4, can you talk about that? Any reason why?

Yishay Curelaru

Yes. Ed, this is Yishay.

Edward Schwartz

Maybe if I misread it, it's fine, but I don't think I did.

Yishay Curelaru

No, you read it just fine. As I mentioned before, our gross revenue went a little bit down, because of year-end adjustment and revenue mix. As for the operating expenses, we are talking about an interest regarding year-end bonuses, both in Israel and all other subsidiaries. And that's the reason.

Edward Schwartz

Okay. And this next question is directed to Shlomi. It appears to me you have a factory relationship when a customer or supplier go to a litigation, how are you going or can you give some color forward as how you are going to replace that business in North America?

Shlomi Cohen

Look, I think that, I mentioned before that we didn't wait to face such kind of event in order to balance major accounts with other verticals and other markets. We are working on that, if I remember it correctly since beginning of last year and basically with such kind of event needless to say that we are having much more freedom to approach directly a major accounts that in the past we were reluctant doing that. So I believe by the way that for the long-term the benefits that we will generate from such events will be very positive for the company and without getting into details at this point of time.

Edward Schwartz

Okay. And the sale to Masterworks Electronics was about $2.5 million, is that going to affect your cash position or ability to make deals in the near future because that's started up in receivables or inventory or whatever?

Shlomi Cohen

I will the - careful and I will say that at this point of time we are not going to place any impact on that. Let's wait a little bit, I'm sure that we will be able to present our products.

Edward Schwartz

Okay. Thank you. I appreciate it.

Shlomi Cohen

You are welcome. Thanks.

Operator

Thank you. Our next question comes from Mike Latimore with Northland Capital Management. Please go ahead.

Nick Goldman

Yes. Hi, guys. This is Nick Goldman on for Mike. Thanks for taking my questions.

Shlomi Cohen

Sure.

Nick Goldman

Just looking to next year, do you guys expect revenue to grow and I guess specifically do you see license and transaction growing next year?

Shlomi Cohen

Absolutely, the answer is positive. Yes, this is part of our new sales strategy and needless to say that we are doing a significant effort in order to increase recurring revenue as part of a strategy that we established beginning of last year.

Nick Goldman

Got it. Great. Okay. And then, just kind of going off that, in terms of the revenue mix, what percent of revenue might license and transaction be this year?

Shlomi Cohen

Okay. Basically today when you are looking let's say I'm actually looking on that and I'm looking on the entire revenue that we are having. We are having today more than 20% of our total revenue that is actually coming from recurring revenue and we believe that we are going to accelerate it during 2017.

Nick Goldman

Got it, got it. Okay. And then, just final one from me…

Shlomi Cohen

By the way, maybe one additional comment; this is by the way a significant change that we were making during 2016 and we are going to accelerate it during 2017 and I believe that because of that it's going to impact our gross margin for the long-term.

Nick Goldman

Got it, got it. Okay. And then, what kind of volumes do you see from the large food chain customer over the next year?

Shlomi Cohen

As I mentioned before, we are not giving guidance regarding the specific accounts but I will say that this is only the beginning with this specific food chain. With -- let's say with the plans we are having at the moment, the idea is to accelerate the number of systems that we are going to implement in the network.

Nick Goldman

Got it. Okay. Thanks guys.

Shlomi Cohen

Welcome.

Operator

Thank you. [Operator Instructions] Our next question comes from Mike Vermut with Newland Capital. Please proceed.

Mike Vermut

Hi, gentlemen. I just want to say you've done a fantastic job turning us around so far.

Shlomi Cohen

Thanks.

Mike Vermut

It seems like we are adding inflection in the business and the business model is changing, right to become a recurring revenue model as appose to a one that consisted the hardware stuff, it was much better for us over the long run, is that the case in Japan, Europe and now what you are rolling out here in the U.S? Are you trying to change that model here with the fast-food, with the banks, with all of that so that the majority of these implementations are going to be recurring in nature?

Shlomi Cohen

Yes. In Europe, it's definitely since they want because don't forget that in Europe we started almost from scratch and today we are starting to see a significant install base over that that based on a recurring revenue. Japan it's actually the same and the idea over there that we are let's say minutes from doing that after the first implementation to generate a recurring revenue and the same thing by the way is taken mainly in the self checkout system. We can see one - by the way, one additional market that we didn't mention but this has begun to be very important for us and this is the Australian market, the total there it's also that we built from scratch. The sales strategy and in Australia, I'm more than happy to say that today we are generating on top of the solution sales that we are doing over there also are recurring revenue.

Mike Vermut

Excellent. Now, also I know Japan there is a deadline out there and there are some significant players with 100s of 1000s of units installed already. Are we in discussions with these players you know, these are -- there are some operators there that operate four, five 600,000 units. Are we in discussions with these now currently because that now it seems like the time where the decisions are going to have to be made over the next year?

Shlomi Cohen

We were speaking not only with them; we are speaking also with few other giants in this market, yes.

Mike Vermut

Excellent, excellent. And then, moving on to IoT, can you just give us some indication of what it is that we are you know, what we are working on? What -- I see, there is a lot of advertisements now coming about exactly what we are doing with Google, Apple, in clothing in devices where we stand on that and where we are going to play in the ecosystem here?

Shlomi Cohen

Yes. First of all, if you remember in the beginning of December 16, we actually presented in your cover payments rate. And we got an excellent feedback from many potential accounts and since then we are walking closely with those potential in order to make it real and in order to see our results during '17. Based on the core technology that we are having over there and since last year we are also walking with few potential accounts, how to implement the flex into their products. And I will say that almost from every quarter we can see a progress in the IoT activities that we are having. What you see likely from Levi's and Google is still not payment. Definitely, it can be a potential for us in order to implement the payment element inside the Levi's jacket and the same with others that are doing a other implementation in IoT, they can be a really good candidate for us. But, I believe by the way that during the coming quarters we will see additional progress in our IoT as well.

Mike Vermut

Thanks. Can we assume that you have approached them to become part of that unit?

Shlomi Cohen

I cannot comment on that.

Mike Vermut

Okay. Excellent. All right, well great progress guys. It's a relief to see the track that we are on here. It seems like there is an inflection in the business going on.

Shlomi Cohen

I appreciate it. Thank you.

Operator

Thank you. Our next question comes from Josh Elving with Feltl and Company. Please proceed.

Josh Elving

Hi. So, a couple of follow-ups; one, I just -- I don't know if you commented on this, I may have missed it, but just -- the opportunities in Europe, I mean, obviously you have done a great job of signing additional distribution partners, and I know that we're actively selling into the European market, but it seems as if the size of our business in Europe is still you know, relatively immaterial, especially in context with the size of the initial purchase order you have out of Japan. I was just wondering if you could maybe talk about you know, the size of our end-to-end solutions or connections in Europe. And then perhaps along those lines, you know, maybe talk a little bit -- I guess, this is a separate question, but maybe talk about the potential for the mix of recurring revenue for the company as a whole over time?

Shlomi Cohen

Okay. So, basically what we are doing in Europe and today also in Australia and also in Japan is that we are actually generating end-to-end solution for the vending operator, for the self-checkout system, and the solution that we are having is actually based on the region for one end, we are having a machine-to-machine device that we are installing inside the kiosk or inside the vending machine. And on top of that, we are giving full software package developed by OTI. On top of the entire solution that generated in OTI, we are giving also the services of the payment processor in the bank. The part that we're raising in the European region is critical and AID, both actually located in U.K. And they are actually giving us excellent coverage for the entire European region. And when we are approaching actually those potential accounts such as vending operator and check-out system operators, we are actually a one-stop-shop for the entire payment needs that they are raising today in the European market. That's exactly what we are doing. And following that, we are able to generate recurring revenue on top of the fact that we are selling in full price the full solution that I mentioned before.

Josh Elving

Okay. So, maybe to be a little bit more specific with that question, can you tell me the number of connections you have in the European market today?

Shlomi Cohen

You know, we are not giving guidance.

Josh Elving

In my guidance, just what you have currently have.

Shlomi Cohen

It's accelerating on a quarterly basis. This is one thing that I can mention. It's accelerating on a quarterly basis.

Josh Elving

Okay. With regards to the purchase order out of Japan, I remember the letter of intent clearly stated that the expectation was to deliver those 10,000 units over a three-year period, and then I thought pretty clearly the actual purchase order suggest that those 10,000 readers would be or systems would be delivered in 2017. And then hearing your comments on this call, suggested it is three years. So, I was wondering if you could provide little bit more clarity as to you know, if the expectation is for the…

Shlomi Cohen

From the beginning, we mentioned the fact that this LOI for 10,000 systems is going to be delivered during 36 months, and fortunately we got the first part of this field, beginning of this year. We are going to deliver it quite soon. And as I mentioned before, the contract is [indiscernible] and we are expecting to have also the same size of field in '18 and '19.

Josh Elving

So, to be clear, so the expectation is…

Shlomi Cohen

Go ahead…

Josh Elving

So, the expectation is to deliver 3,333 units in each of '17, '18 and '19, or the expectation is to deliver 10,000 in '17, but has the recurring component over the…

Shlomi Cohen

No, no, no. As we mentioned in the beginning, its size are bit more than 3,000 systems for the next 36 months.

Josh Elving

Okay. On the petroleum business, in previous quarters you have talked about you know, very optimistically about that business and for the last couple of -- on the quarters we've been running right around a million, million one in revenue talking about this being a healthy double-digit revenue growing business, so at what point in time does that kind of start to show that revenue growth because I think we are down year-over-year in 2016 from a revenue perspective?

Shlomi Cohen

Yes, I think that one thing that I miss to mention is the fact that the same efforts and restructuring that we were doing in the payment part of OTI Group, we were doing the same thing in the last six months of 16 in PetroSmart and this is actually quite soon going to present a significant change in our results later on this year and one of the changes or one of the biggest changes that we were doing in PetroSmart, it was again touching the sale strategy over there and I'm more than proud to say that in the beginning of this year, we got our to say a significant purchase order for one of the biggest oil company worldwide that is also based on our recurring revenue meaning that we are actually going to be -- OTI will be compensated as part of the business model over the per gallon and this is a significant change to the previous years. It's exact time, but we are in the right direction.

Josh Elving

Okay. And then, I guess I just had one last comment and I appreciate all your help with my question, if you could have the quarterly results more than 30 minutes before the conference call starts in a future that will be extremely helpful? Thanks guys. That's it from me.

Shlomi Cohen

Okay. That's the question?

Operator

Thank you. Our next question comes from Kevin Dede with Rodman. You may begin.

Kevin Dede

Thanks, Shlomi, and apologies for the naive pay, but could you help me understand how the wearables and IoT solution business model works and where we would see the revenue fallout?

Shlomi Cohen

Yes, one of the things that we were doing in order to be more focused in the IoT business. First of all, I would say that IoT it's impossible that everyone is actually using but if you dig in a little bit and you will fight to evaluate and how many IoT companies are actually dealing with the payment, I believe that you will not find too much because this market on top of the fact that it's heavy regulated, it's also a little bit complicated for implementation. We decided to focus on few vertical inside IoT payment and this is actually the fashion food and health curve and automotive, those are the main ones. There are few others that we can touch but at this point of time we decided to focus on those vertical. In each one of them, the implementation is a little bit different and I'm not sure in this discussion we are going to cover with it but basically with the way that we are implementing the IoT element and echo system that we are having around it we are -- we can show to our potential account how we are going to accelerate gross margin and how we are going to accelerate also revenue, I will be more than happy by the way when we will meet next time to speak with you in detail about it.

Kevin Dede

Okay. That's fair, Shlomi, I appreciate it. Is it - do you think it's fair to assume, we could see that IoT/wearable payment solution contribute to revenue this year?

Shlomi Cohen

I will try to be very careful regarding that and try to answer this question next time.

Kevin Dede

Okay. That's fair too. Given what you see on the four main drivers this year. At what point and at what level I mean I guess this assumes a certain basis of operating cost too? But I'm just wondering where you think that breakeven point is in revenue?

Shlomi Cohen

You will speak about that the fact that we are still not profitable I believe.

Kevin Dede

Correct, correct. Yes and plus the fact that you are optimistic regarding the four drivers that you see contributing to revenues this year?

Shlomi Cohen

Okay. As I mentioned by the way before, when I was actually presenting the results of '16, I mentioned also the fact that we strongly believe that during 17, we will present a positive adjusted EBITDA and I believe that we are not far away from that and that's the reason that we are totally positive regarding that.

Kevin Dede

Okay. So from an operating cost perspective, are you expecting those costs to remain flat? I mean, I know that you saw reduction in R&D cost and given the way that you streamline the business from 16 to 15. I'm just wondering what happens now especially given that you will have to make some capital allocations to meet expectations.

Yishay Curelaru

Kevin, this is Yishay. We are doing our best to maintain and enhance our operating expenses, but if you look at the previous quarter and if you look to the future into 2017, we intend to stay and also try to reduce our operating expenses.

Kevin Dede

Okay. So your hope is that you can still drive revenue and monitor expenses, so that they are down in '17 versus '16?

Yishay Curelaru

That's correct.

Kevin Dede

Okay. Thank you very much gentlemen. I look forward to seeing you at some point soon, Shlomi.

Shlomi Cohen

Thank you.

Operator

Our next question comes from Edward Schwartz of Schwartz Investments. Please proceed.

Edward Schwartz

Yes, hi Shlomi. Just a follow-up question to Josh's on fuel; during recent visit to one of them like local wholesale clubs, I noticed, I can use NFC at the gas pump, could you give some color as to what you are doing in that area in the North America?

Shlomi Cohen

Yes, basically if you will see and you visit our website, you will see that OTI with a existing product line that we are having. We are actually certified by MasterCard, Visa, American Express, Discover, Apply Pay and Google Pay and basically any reader installed in any place including the gas station and you can pay with your mobile phone based on Apple pay or any other mobile application that supported without windows. So from this point of view, the platform is actually opened to those payment methods.

Edward Schwartz

That's correct, but what I'm asking is, what is your marketing effort into that market -- into the gas pump market?

Shlomi Cohen

Walking with implementing our technology in the fueling business this is something that we were doing so far outside of the state. One of our plans by the way, during '17 is to start the active in the North American market and I believe that during the coming quarters, we will be able to speak about it a little bit with more details and then to expose the entire market regarding our efforts in this direction.

Edward Schwartz

Okay. Thank you very much and good luck.

Shlomi Cohen

Thank you.

Operator

Thank you. Our next question comes from Mike Vermut with Newland Capital. You may begin.

Mike Vermut

Hi, guys. A couple of quick follow-ups here; it seems to be here in the U.S. market we've supplied the hardware and everyone else has reaped the benefit. All right, they've got the recurring revenue, they've gotten the margin and we've been the small part of it and really haven't reaped the rewards of what's going on in the market? Can you just give us a sense as to your vision and how our model is going to change in the U.S. market? We are seeing all the fast food restaurants with the kiosks and food stores and the gas stations, across the board, everything is exploding right now, and how we are going to become a larger player in that with the recurring revenue? And what's going to change here, because it seems to me we have to move away from this being the hardware supplier to our current customers, and how we become a larger part of that?

Shlomi Cohen

Okay. Look, when you are actually going to a Greenfield, and for us, Europe last year was a Greenfield; I don't want to say that it's easy, but relatively it's easy to start and to implement unused strategy and that's exactly what we were doing in Europe and also in Australia and also in Japan, by -- from day one, selling our solution and on top of it, we generated revenue. U.S. market was a little bit different. I don't have to tell you, you know that we were being active over there before my time, and to change this approach it's a little bit more challenging, but we are doing it. And this is a good news, because I think that the beginning of this year we gave you a very strong example that we are going in to this direction, especially when we are actually approaching a new vertical such as the self-checkout system. And for the long run, the answer is positive, yes, we are going to change the strategy and we are going to generate recurring revenue from the business. On top of the fact that we are going to provide more and more solution and we will be less and less box mobile [ph] in this market. So I am saying again, it takes time, but yes, we are into this direction, where our intention is not being a box mobile in this respect.

Mike Vermut

Excellent, excellent. And then, I assume eventually we are going to hear who the customers are here in the U.S. that we are talking to -- I assume that would help all of us get a grasp as to how large this is.

Shlomi Cohen

Needless to say that I will be more than happy to tell you that, but you know, sometimes I am having difficulties from the other side, and I respect it, but on my interest to expose such big name in the U.S. market.

Mike Vermut

Excellent, excellent.

Shlomi Cohen

Needless to say that it's going to help us a lot.

Mike Vermut

Excellent. Okay, and then last question here; it seems from what you have said on the IoT side, in the not-too-distant future we should be hearing a lot more as to the developments that we are having?

Shlomi Cohen

Yes. As I mentioned before, I'm very really positive regarding the IoT. We are doing significant effort into this market, and yes, the idea is eventually to start generate business out of this significant activities that we are delivering.

Mike Vermut

Excellent, okay. All right, thanks a lot guys. Look forward to hearing from you soon.

Shlomi Cohen

Thank you.

Operator

Thank you. At this time, this concludes our question-and-answer session. I will like to remind everyone that a recording of today's call will be available for replay via link available in the Investor Relations section of the company's Web site at www.otiglobal.com. Thank you for joining us for today's call. You may now disconnect.

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