On Track Innovations, Ltd. Q2 2008 Earnings Call Transcript

| About: On Track (OTIV)

On Track Innovations, Ltd. (NASDAQ:OTIV)

Q2 2008 Earnings Call Transcript

August 28, 2008 9:30 am ET

Executives

Oded Bashan - Chairman and CEO

Ohad Bashan - President

Guy Shafran - CFO

Analysts

Brian Ruttenbur - Morgan Keegan

Greg Simcik - Dunn Research Contract Innovation

Jay Meier - Feltl

Andrew Home - Dougherty & Company

Marc Silk - C. Silk & Sons

Derry Swavalley - Forge Capital Management

Stephen Silk - C. Silk & Sons

Gary Schwab - Valley Forge Capital Management

Operator

Good morning and good afternoon to all OTI investors, analysts and other interested parties worldwide on our second quarter 2008 results conference call. As a reminder, this conference call is being recorded today, August 28, 2008 and the replay of the call will be available on the following US toll free number, 1-877-456-0009 until September 4th. 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 Guy Shafran, 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.

Our 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 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 protracted 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 31st, 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. Ohad, would like to begin?

Ohad Bashan

Yes. Thank you very much. Thank you all for joining today’s conference call. I will give an overview of the results and business development, and we will then open call for questions which will be addressed by Oded, Guy and me.

Consistent with our discussions in the last conference call, 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 continue to shift our focus toward high-margin projects with recurring revenues combined with commercial rollouts. We believe our actions will pave a clear path to profitability for OTI. We continue to have a strong and healthy balance sheet with $110 million in total assets and more than $34 million in cash, cash equivalents, and short-term investments.

During the first half of this year, we have taken significant measures aimed at reducing our operating expenses. The impact of these measures will be fully realized during the latter part of the second half of this year.

Total operating expenses for the first half were $19.1 million on GAAP basis and $14.5 on a non-GAAP basis. Our operating expenses are influenced and are suffering from the weakness of the dollar versus the Israeli shekel. In the first half of 2008, the Israeli shekel appreciated about 15% versus the U.S. dollar rate of the same period last year.

During the first half we burned $7.1 million in cash from operating activities. The relatively high rate of cash burn during the second quarter is mainly related to the decrease in trade payables and receivables at the end of the second quarter. We are on track to reach our goal of having $7 million quarterly operating expenses on a non-GAAP basis. We are doing this by reducing headcount, focusing on the necessary expenses only, cutting down on professional services and shifting them in house.

The first half results are in line with our expectations with revenues of $20.3 million, relatively flat compared to $20.6 million in the first half of 2007. Based on mid-year results, together with our current visibility until year-end, we are maintaining our guidance of 10% growth year-over-year with most of the growths coming in the fourth quarter of the year.

The second quarter was better than the first quarter of this year. Revenues increased by 18% to $11 million and the gross margin increased to 39% from 32%. Significantly, GAAP net loss decreased 17% to $5.7 million, and non-GAAP net loss decreased 35% to $3.1 million.

These results are due to a shift in the revenue mix in the payment sector from components intended for U.S. contactless card payments market to greater sales of readers, solutions for the mass transit market, EasyPark and more, as well as contactless card payments in non-U.S. markets.

While we have been continuing our strategy of reducing manpower, the result in savings take two to three quarters to show up in the P&L.

Looking at the first half of 2008, revenues based on by vertical markets, the payment market was 60%, petroleum market generated 12%, the SmartID market generated 12% and OEM sales were 26%.

The geographic mix of revenues for the first half of 2008 was as follow. Europe was 50%, Asia was 18%, the Americas 12%, Africa 10% and Israel 10% of total revenues. In our press release we included a comparison between the first half and second quarter of 2008 to 2007 on a non-GAAP basis. In the reconciliation of GAAP to non-GAAP results on our P&L, FAS 123R in 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 half of 2008 operating expenses was about 3.9 million amortization of intangible asset was $658,000. The impact on the second quarter of 2008 operating expenses was $2.2 million and amortization of intangible assets was $329,000.

Our pipeline of new projects continued to increase as a result of our long-term strategic initiatives on multiple fronts. We have enhanced and broadening our relationships with channel partners and qualifying OTI products with the right organizations. While these relationship are expected to yield significant revenues to OTI overtime that involve processes characterized by long and extensive testing and qualification before revenues can be realized.

Their qualification due-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 each one. We are making headways in being able to secure additional projects in the verticals of ID, petroleum and payment, most of which we will initialize in the second half with majority of the revenues realized in 2009 and beyond.

These projects are expected to provide higher margins and contribute to our growth. This is consistent with our earlier forecast and estimation for 2008 been a turning point year. We still expect most of the change to happen in the second half of the year and most of the growth to show in 2009.

I would like to give a little bit of an update on some of the business developments. OTI provides superior cost markup products, technology and solutions in three primary vertical markets; payment, petroleum and ID. We are making progress in all vertical market. Our offerings in the payment includes solutions for contractors banking cards, (inaudible) solutions and (inaudible) called EasyPark.

We offer cards, readers and production machinery based on year's of experience and a significant IT portfolio that result in a superior product in terms of the durability, performance and throughput. OTI is offered into the contractors banking markets it's unique we provide both card and reader solution for both the Visa and MasterCard contractors programs.

Our focus in the contractors banking card program is to support MasterCard and Visa in their efforts into different region. The [ENV] market offers a great opportunity for OTI. The most region product requirement means that we are able to leverage our technological know-how and also the fully certified product to the card associations, banks and merchants.

We already see new markets in Europe beginning to adopt contractor statement with increased contractor infrastructure sales and a growing pipeline of order and hope to be able to specific additional new countries, collaborations and product sales in support of this growing market this year.

We continue to work through market leaders to integrate our rate of technology with the product as well as working with the leading card providers to offer card solutions to financial institutions.

This quarter we have seen advancements in mass transit market, as we reported that OTIs wholly owned subsidiary important asset will provide a transport department of the city of Warsaw with additional public transportation and street parking contractor tickets. This is an additional award following the labeling of more than a million cards that have already supplied as part of the program.

The additional contract award deliveries are expected to be completed this year. In the US we see some encouraging indicators that orders invoice for contractors banking cards should increase. Although volume didn’t pickup as expected in the last two year's, it is important to mention that the price pressure on contractors component remains very high and prices have decreased at the rate of about to 20% to 25% over the last two year's mainly the silicon prices. As a result the gross margin on the (inaudible) product is lower compared to other products we provide, and we may decide to pat on some opportunities that might be considered as non-profitable opportunities in this market.

We continue our efforts to market EasyPark internationally. EasyPark is our (inaudible). As we recently announced our subsidiary parks OTI acquired 100% of the share capital of ID Parking a Paris based company that provide a total parking solutions.

Park is OTI subsidiary responsible for marketing, operating and distributing advanced parking solutions including the EasyPark product. The acquisition is in accordance with OTI strategy of focusing on product and projects which generate higher margin, recurring revenues and supports OTI’s global efforts to market the EasyPark products.

The transaction provides OTI with a platform to readily access the French electronic parking payment market and offer multiple solutions for parking payment, including EasyPark. EasyPark business model is one in which revenues are generated from product sales, transaction fees and customer support.

We continue to progress with local system integrators for a number of projects since we believe our partnerships with well-established integrators will reduce our time to market and accelerate our penetration and hope to be able to report additional progress on EasyPark this year.

In the IT market, our product offerings include end-to-end solutions for electronic passports, border crossings, National ID and medical cards. The unique solution is based on significant out fee, including a patent portfolio that covers manufacturing techniques, applications, processing and more. The system is based on OTI’s MAGNA, a modular platform that offers short implementation and quick integration with the country’s existing border control system and provides external interfaces to the country’s central electronic certificate storage for signature verification.

We recently announced that OTI signed a contract with the electoral commission of an African country to implement the upgrade of the country’s permanent border registry, including new biometric based voter cards. The value of the initial contract is over $2 million with more than $1 million expected to be realized this year. The project’s objectives are to verify the voter’s identity, detection of the border’s registration attempts and issue a new voter ID card that with its advanced security features which will be used in the next elections. The system willl ensure one person one vote.

MediSmart is our modular health IT solutions which transforms the patient’s electronic health record to a portable medium, enables sophisticated patient and provider authentication, implements secured encryption and provides integration with legacy health of IT systems. MediSmart is yet another successful implementation of our business model in which revenues are generated not only from the purchase, but also from transaction fees. We look forward to be able update you regarding our progress in MediSmart.

Our joint venture for manufacturing and selling electronic travel document inlays for a major Asian government experienced some delay and they are not related to OTI’s performance. We believe that most of the delays are behind us and expect the project to start this year with initial orders expected before the end of the year and 2009 to be the first year of commercial production.

In the petroleum market, we have received positive feedback from the initial Chevron implementations and we estimate that this solution will start to be implemented in Asia-Pacific during the year.

To summarize, during the first half of 2009 we focused on making our global operations more efficient and effective by reducing our expenses while increasing our project pipeline. This is reflected by our current level of expenses while we continue to implement cost-saving measures. Entirely, we are focusing on securing high-margin projects with recurrent revenues and building a strong part-time focus on short and mid-term growth. As we have indicated before, it is our belief that most of the significant delays are behind us and we are confident about the Company’s growth.

We still believe that this year will be a turning point for OTI in terms of showing a clear path to profitability and will reflect the revenue growth of about 10% over 2007 with most of the growth expected in the fourth quarter of the year.

We will now be happy to take our questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Brian Ruttenbur of Morgan Keegan. Please go ahead.

Brian Ruttenbur - Morgan Keegan

Thank you. I had a question about the Asian joint venture, what’s the timing of that and can you give us an update on that?

Oded Bashan

Hi, Brian. The update that we can provide is that -- as we have indicated on the call we believe that most of the delays are behind us on this project. We are expecting initial orders this year with full commercial production next year.

Brian Ruttenbur - Morgan Keegan

Okay. What time next year, first or second half?

Oded Bashan

I believe it would be spread over the entire year. Obviously, first year of commercial production is always characterized with some level of ramp up, but we are talking about first commercial production next year. So, 2009 is expected to yield significant revenues from that project.

Brian Ruttenbur - Morgan Keegan

Thank you.

Operator

The next question is from Greg [Simcik], Dunn Research Contract Innovation. Please go ahead.

Greg Simcik - Dunn Research Contract Innovation

Good morning. We have been a recent purchaser of your stock. I have two questions. Based on your control of cost that is about $7 million a quarter and your current margins, profitability should come around $16 to $17 million a quarter, is that about right?

Guy Shafran

We are expecting to breakeven in the range of $57 to $63 million obviously depending on the revenue mix. And so that -- and assuming that we’ll get the $7 million on a non-GAAP basis. And all the numbers I am mentioning by the way are only on the non-GAAP basis.

Greg Simcik - Dunn Research Contract Innovation

My second question is of those potential clients that you now are testing products for and are not approving revenues, how much is that in total revenues would you say? In another words, of the people of all the contracts that you have that are not recording revenues, but you have anticipation of revenues if the tests go well, what are we talking in terms of revenues?

Guy Shafran

First, we do not have any customers that are non-paying customers. We have stages for positive implementation. And within these stages you’re looking at field tests or pilots that can last anywhere between 6 to 12 months. It really depends on the customers and how the customer is ready. And then you are looking at commercial rollouts. Right now we have commercial rollouts in each of the verticals that we are looking at and most of the growths that we are expecting for the company is based on existing pipeline of opportunities that are expected to move from pilot stages into commercial rollouts over the next 12 to 18 months.

Greg Simcik - Dunn Research Contract Innovation

I understand that, but that isn’t my question. My question is trying to put a value on the potential tests that you are having. For example, if all went well and everybody tested well and they did their rollouts that we talking $10 million, $6 million, $30 million, what kind of numbers can we put on the tests that you’re doing?

Guy Shafran

Okay. Obviously my – I have to be very careful with my answer not to create too many expectations here. But we are dealing – right now we are dealing with a very large opportunities that – a multiple opportunities, each of these opportunities can lead it to OTI on an annual basis, we are talking multiyear contract. And each of these opportunities – some of these opportunities post $5 million a year, some of these opportunities post $7 million a year. So, the opportunities that we are discussing are very, very significant. But obviously, the timing of these opportunities from when they are – from the stage that they are at right and to moving into full commercial rollouts is totally dependent on the customer. It is not dependent on OTI.

Operator

The next question is from Jay Meier of Feltl. Please go ahead.

Jay Meier - Feltl

Hi. Thanks for taking my call. You continue to say, you see a clear path to profitability. Can you put a time context on that? I mean, can you give us a little bit more color on that? When do you want to anticipate earning profitable?

Guy Shafran

Well, first I believe that as we progress in the quarter this year, it will be more clear to everybody. And then we are expecting, if everything goes well, that next year we will turn that profitable or breakeven on a non-GAAP basis.

Jay Meier – Feltl

In fiscal 2009?

Guy Shafran

Yes. This is the current expectation.

Jay Meier - Feltl

Okay. Well, that’s good to know. And you mentioned your pipeline continues to strengthen. Can you give us some color around that? Do you require to find that? How big would you estimate your pipeline is right now?

Guy Shafran

The pipeline is built from a multiple projects in different stages. And right now, we are dealing with large opportunities that can use – each of these opportunity, and I am talking multiple opportunities, can use more than $10 million a year. But as I said, the timing of these opportunities turning into commercial rollout is dependent on OTI.

Jay Meier - Feltl

Well, let’s just assume hypothetically that each one of those opportunities is hypothetical just to everybody, it’s clear on that. Each one of those opportunities did executed and began production simultaneously, what would your annual revenue expectation be for those pipeline opportunities in year number one?

Oded Bashan

Hey, good morning. This is Oded. I don’t expect – we don’t want to go and one of them will happen because then you know you won’t depend things then it’s coming very good expectation, and we wants to be conservative and careful. What we are saying that we will talk to everybody, each line one of them were being up for the both $10 million analog when it’s working and each of them is for multiple years, I would say between 5 to 10 years each project like this. So, this is opportunities that we are working.

Of course, I don’t expect all of them to become in full production at the same time and to begin at the same time. We expect it to begin in – beginning of – the end of this year mainly by order and mainly to begin in ‘09 and that’s why we said that we expect today a breakeven on non-GAAP a little bit [faster] than for the ‘09.

Jay Meier - Feltl

I understand. And you said multiple opportunities, is that between 5 and 10, between 1 or 5 –

Jay Meier - Feltl

Jay, I mean, I for just not to go into the exact numbers because obviously when you multiply five opportunities of more than $10 million, that’s become a very large number. We would like to be able to report good news to all of our shareholders as they progress and as they happen. So, we are talking right now several opportunities that are significant for OTI and that can determine a very – that can show a really clear path to profitably going back to your earlier comment.

Oded Bashan

But give us the opportunity to report it on a real-time basis for everybody to be happy.

Jay Meier - Feltl

Okay. That’s fair. I have one more question then. In your view, how many companies globally today have an ISO 14443 AB certified contactless inlay?

Ohad Bashan

It really depends because if you are asking about MasterCard Visa certified product, I assume this is really what you are asking, because the ISO 14443 is technology standard. But in order to sell a product you need an application on product that work on it. You are talking – and then you are going into the silicon manufactures. You are talking not more than four to five companies around the world today that has certified product.

I think that one of the unique roles that OTI plays is that we are the only one in the marketplace that has a complete end-to-end solution. In other word, we are the only one that have production line in the certified facilities, OS, readers, and we offer solutions for both, EMV which is the European market as well as the U.S. market.

So, when you are talking at then all, at the product portfolio, one has to look at the depth of product and offerings that we are offering to all of our customers which is really the added value that we provide and it’s not just on the component level.

Jay Meier - Feltl

I understand. Very good. Thanks.

Ohad Bashan

Sure.

Operator

The next question is from [Andrew Home] of Dougherty & Company. Please go ahead.

Andrew Home - Dougherty & Company

Thanks. Good morning and good afternoon. I just wanted to follow-up little bit on your acquisition of [Parex]. That acquisition has closed, correct?

Ohad Bashan

It is closed.

Andrew Home - Dougherty & Company

Okay. And what kind of revenue should we expect from that acquisition or cost? Should it be accretive or is that going to you – we back from $7 million range or –?

Guy Shafran

No, it is expected to be accretive. And the additional expenses are insignificant in terms of the overall company performance. So from that perspective, I think that the acquisition will positively contribute to OTI performance this year and next year and beyond that course.

Andrew Home - Dougherty & Company

Okay. And I then just have a follow-up, what is your headcount now?

Guy Shafran

We have 580 employees.

Andrew Home - Dougherty & Company

Okay. It sounds great. Thank you.

Guy Shafran

Sure.

Operator

The next question is from Marc Silk of C. Silk & Sons. Please go ahead.

Marc Silk - C. Silk & Sons

Hi, Ohad. Thanks for taking my questions. Let’s talk about petroleum. Was the rise in the price of oil has given the shift in the attitude of some of your potential customers?

Ohad Bashan

Absolutely Marc. The higher the price of a gallon, the higher the motivation of people to – the higher the float rate is and higher the impact of every percentage of float. So if one fleet or one company was looking at 2% or 3% float, I am talking U.S. numbers previously, well obviously the high of the prices of the gas, and everybody feel the impact of the float which obviously creates much nicer ROI for easy fuel implementation. So, we do see a shift in the level of interest and the level of execution on each of new project.

Marc Silk - C. Silk & Sons

Okay. That’s what I thought. Now, on a few conference calls you asked how many pilots you had in the patrolling. You said, well, some of the pilots have moved to implementation. So, can you kind of let me know by the end of the year, not including the Chevron to Asia-Pacific area, do you expect to announce any new petroleum customers?

Ohad Bashan

We expect to announce additional progress in the petroleum section. I don’t know which it’s going to be, a new customer or a major expansion of existing projects.

Marc Silk - C. Silk & Sons

Okay. Let’s shift to the help card area. You are in two pilots right now, are there any more than the two pilots, and I think in Kenya and South Africa or it’s just two right now?

Ohad Bashan

Right now, we are all focusing on successfully executing the two programs that we are involved in which is Kenya and South Africa. Both opportunities are significant in terms of size and the pipeline of development for the next 12 months. And it is important for us to successfully execute our respective all programs. All programs provide and contribute to OTI ongoing transaction fee, high margin, recurring revenues. So obviously, we are putting a lot of focus there.

Marc Silk - C. Silk & Sons

Yeah, and on other related note on Tuesday’s Wall Street Journal, looks like India is poor at getting the health card, also I know it's not your program and it’s a contact card. But at least it is getting exposed to this health area and I like to see the recurring revenue model which I think is going to be the key to you guys.

Oded Bashan

I agree.

Marc Silk - C. Silk & Sons

Guy, I have a balance sheet question. I know, you are even carrying short-term bank loans for while. What is your credit limit with that specific bank?

Guy Shafran

We have a few credit pensions on the company. We have short-term credit being given in each of the subsidiaries. And so, it depends, are you speaking about the local, global short-term credit that OTI can take?

Marc Silk - C. Silk & Sons

Yeah, if you can say the combination, that would be fine.

Guy Shafran

It's the ballpark figure.

Marc Silk - C. Silk & Sons

Hello, did I loose you Guy?

Guy Shafran

Communication problem?

Marc Silk - C. Silk & Sons

Can you hear me?

Guy Shafran

We hear you, Mark. Well, it seems, I think that you want to repeat the question and --?

Marc Silk - C. Silk & Sons

Well, what I am getting to is, if you have another cash in the balance sheet. Why you carrying the short-term debts, is it finance your inventories. I was just kind of curious about that?

Guy Shafran

Mainly it’s a credit line. So, we are working to grant for the working capital that we are announcing.

Marc Silk - C. Silk & Sons

Hello.

Oded Bashan

Yes Guy, we can hear you.

Marc Silk - C. Silk & Sons

Okay, I am sorry. We have a credit limit of around -- Hello.

Oded Bashan

Yes Guy, we can hear you.

Marc Silk - C. Silk & Sons

Okay. We have a credit of short-term net banking of around 3 million. I am sorry, about the communication problem, I am in China now. So, sorry for that.

Alright, and let’s talk about the EasyPark for a minute. Going back to the French acquisition. They have their own system where it’s just like a card that you put in the car and hearings of people from Israel, they think you are in car parking meter is fantastic. So, how do you expect the turn the French over to your model. Because I am sure that is going to be more advantageous than the previous model that is in French, right now.

Oded Bashan

First, in France there is an existing solution, which means in-vehicle parking meter solution. EasyPark offers a more user-friendly and a much bigger revenue path for the municipality as well compared to the existing solution. So, our goal is to offer better solution, more technology advanced in interactive business model for both consumer and municipality.

Marc Silk - C. Silk & Sons

Can we expect any new EasyPark announcements by the end of the year as far as new countries etcetera?

Oded Bashan

Yeah, working hard that we’d able to announce something.

Marc Silk - C. Silk & Sons

I was listening to the [Chinmalto] conference call. I mentioned that point of sale terminal suffered from a faulty component in their contract manufacturer or supply chain in the first half of 2008. Number one, I want to make sure that wasn’t you guys involved in the first half of 2008 with [Chinmalto], can you confirm that?

Ohad Bashan

We are not aware of any faulty component that OTI is delivering.

Marc Silk - C. Silk & Sons

Okay, second question, do you know of any other companies like [Chinmalto] that have had problems with component issues because obviously going with this strategy, fucking up with bigger cut being the second supplier, I’ll see this complaint right into your strength. So, have you heard of any other companies that have gone into this type of issue recently?

Ohad Bashan

I have so many good news and good stories to tell about OTI. So, let’s stick to that Mark.

Marc Silk - C. Silk & Sons

Okay. I had some more available but let people let get on and then I will come back. Thanks.

Ohad Bashan

Thank you.

Operator

The next question is from [Derry Swavalley], [Forge Capital Management]. Please go ahead.

Derry Swavalley - Forge Capital Management

Thanks for taking my call. Ohad, can you say anything about the MIT [Myfair] hacking in the transit area, is that help you at all in any way?

Ohad Bashan

No, it doesn’t help and it doesn’t hurt. Obviously, [Myfair] is a certain technology standard but whatever you’re implementing in transit solution, the transit operator usually builds-in protection against fraud in back-end, in front-end in multiple layers. So, I don’t see that is in any compromise for security of the system. What you choose is you choose, you can hack in micro card. That’s not a major news to anybody. Because those additional protection and defense system that you can put it on the card in the communication, in the wheeler, in the back-office etcetera.

Derry Swavalley - Forge Capital Management

Okay, are your cards more expensive than the [Myfair] card?

Ohad Bashan

When we are providing a microprocessor-based solution, yes they are more expensive. It’s on the high end of the product portfolio, and [Myfair] is more of a low-end commodity-type of solution.

Derry Swavalley - Forge Capital Management

What about the Oyster Card so that the one that’s discontinuing their Oyster Card.

Ohad Bashan

I believe Oyster is in the same level of technology as the [Myfair] card. It is not in microprocessor based solution, but --

Derry Swavalley - Forge Capital Management

No. If they are discontinuing the card, do you know what they are doing over there? Is that --?

Ohad Bashan

Gary, I don’t want to be a spokesperson for the long-term transit so --

Derry Swavalley - Forge Capital Management

Okay. Can you talk about which specific products in your pipeline? When I say specific products, I mean, is it in your card? Is it in your EasyPass? Is it in your [medical]? Is it oil in your pipeline that you are increasing the most, and which of the closest to actually breaking into commercial?

Ohad Bashan

Obviously, you can see that’s on the revenue contribution of which of the product line the payment is the closest to commercial rollouts, and this is mainly driven not by OTI, but the MasterCard and Visa organizations and the financial institutions, banks, merchants etcetera. We do expect that over the next 24 months, all the market segments which is ID, payment and petroleum, each are going to have a major rollout in one of them.

Derry Swavalley - Forge Capital Management

Okay, and are these the ones who are in the pilots right now.

Ohad Bashan

Absolutely.

Derry Swavalley - Forge Capital Management

Okay. Alright, thanks.

Operator

The next question is from Steven Silk of C. Silk & Sons. Please go ahead.

Stephen Silk - C. Silk & Sons

Hello, good morning. I am interested in the recurring revenue, prospects that the company has. Are you driving any revenue right now that would have been in this quarter that you would consider to be part of the recurring revenue model.

Guy Shafran

Absolutely. All the revenues, for example, from EasyPark in Israel, are recurring revenues, not all, but much, we have revenues from BP in South Africa. That is ongoing revenue, as we have revenues from the medical card programs that are ongoing recurring revenues.

The medical card programs, obviously the revenues are not significant at this point. They are getting bigger every quarter when more and more cards will be issued to consumers and the same goes also for EasyPark. And BP well, the revenues are significantly higher there. And the module that we have is demonstrating itself very nicely with both programs.

Stephen Silk - C. Silk & Sons

And that kind of leads to my follow-up, where you are in some of these cycles where early stage ramp-up we will be adding additional this quarter, which is going to bring you to a higher, recurring revenue base, day one of the first quarter.

Oded Bashan

I think that one should expect that the moving forward on an annual basis, you will see the transaction proportion growing more and more as more programs may move into the commercial state. Basically, if you want to characterize it in terms of periods, than between -- the first and the third, in the first we use usually customers are setting up infrastructures and early adopters are starting to use the system.

And as you move closer and closer into the third year of implementation, then transaction fee becomes a much, it takes a bigger portion in terms of the revenues. Our goal is to move and get into the third year of implementation where transaction fee becomes meaningful in as many programs as possible. Obviously, as we progress on the timeline and projects continue to migrate from pilots into commercial roll-out, you will see this shift also in the mix of revenues between products and transaction fees.

Stephen Silk - C. Silk & Sons

So, some of those important once, where do you stand in that zero to two to three year period, when you start seeing those?

Oded Bashan

With EasyPark in Israel we are already beyond the early adoption, and now we’re on the mass production what we call a commercial scale and implementation. Well, in Israel for example, we have more than half a million people using EasyPark on a daily basis. Now, when you are looking at a country and the size of Israel, that’s a very, very significant number.

With BP we are in the fifth year of implementation of the program. So, you are talking about programs that have showcased the model of ongoing high-margin revenues on a recurring basis. We are confident that once more and more programs will move from where they are today into more advanced stages, then this mix will be shown and demonstrated to everyone.

Stephen Silk - C. Silk & Sons

Okay. I just wanted to touch on the Boston’s Charlie Card one more time in the MIT people. My question is, obviously sell down on the [bow] as far as, it not working, and now you see that in newspapers. So, the perception is going to behave this is something that was implemented and isn’t working. Is it a situation of perhaps Boston’s choosing a cheapest way to get it going out instead of looking forward to the fact that it’s less secure? Is this something that could have been avoided? And are you presenting situations that have much more security so that now that the Boston situation is out there, your selling point is – maybe were a little more expensive, but you are not going to have these security problems.

Oded Bashan

Well, first, we have – again, I’ll address some of the issues that I observed in my earlier answer. But the security of the system is divided into front-end and back-end systems. Obviously on the front end, our card is offering a higher level of security, absolutely. We present in that – the communication is not only on the card side, but it’s also on the reader side. But one has to make the judgment, and I mean by one, an operator has to make the judgment where they are investing. Are investing a little bit extra on the card and gaining this additional security or they are investing in other places, this is not for us to decide.

If you look at OTI’s project, then you can see that we have significant projects that are related also ID where one can not compromise on the security of the card or the device. And then the customer is willing to invest a little bit more on the card but is getting full protection in terms of the card security, it’s all about metrics, pin codes, all additional encryption mechanisms that we implement into the built-in operating system that is running on the card today.

Stephen Silk - C. Silk & Sons

And I just have one final thing. The Australian company that got you involved in Utah and it’s interesting to see that expanded, and I am ready to see that. That company in Australia also bring you into other projects and how larger they and what’s the potential with that partnership?

Oded Bashan

One of the most common strategies that OTI has is to lever its channel partners and to establish strong relationships with system integrators, OEM providers, terminal and a complementary equipment manufacturers. Obviously, whatever we are making such a relationship we are hopeful, but this will bring us to multiple opportunities usually it's mutual between both companies. So, we are looking forward to report an additional successes.

Stephen Silk - C. Silk & Sons

Okay. Good luck.

Operator

The next question is follow-up question from Jay Meier, Feltl. Please go ahead.

Jay Meier - Feltl

Yes, thanks. This is a quick one. Can you give us an update on the [nuance] shareholders are they -- did they still currently won stock or is that your view that they are out.

Oded Bashan

I usually don’t keep accurate track of (inaudible) or the situations of the share balance. But we know that they still own some stock. I don’t know the exact number of the stock that they own.

Guy Shafran

They own 100,000.

Oded Bashan

About 100,000, this is what we understood.

Jay Meier - Feltl

Okay. Thank you.

Operator

The next question is a follow-up question from Marc Silk of C. Silk & Sons. Please go ahead.

Marc Silk - C. Silk & Sons

Ohad, the announcement will go on date back, regarding the smart sticker running out of the recent (inaudible), it sounds like a nice gateway to MSC which can still be 4-5 year's away. Are you gaining any traction from this product?

Ohad Bashan

The smart sticker that OTI has designed is provides a wonderful migration pattern, and great opportunity for issuers and providers to capture a market share an instance enrolment if you will of the devices into their financial program. Obviously, we are here offer seamlessly a solutions that are providing significant integration to the existing infrastructure. This is what we are here for. More innovative product that are easy to implement and easy to install in the marketplace. This smart sticker is a perfect example of such, we are getting very good feedback from the smart sticker product, we have already announced that it's been used in certain universities in the US (inaudible) of the customers that is implementing this program on a payment on a large scale in Turkey and we are hopeful to announce additional customers who are using this product for their own unique benefits.

Marc Silk - C. Silk & Sons

Sticking with the payments is now a secrecy about the banks in the US and UK really going through some troubles now, which might be putting the payment side in the back burner in the short-term. But an interesting comment from Visa few weeks ago that they want the 2012 Olympics in London to basically be cashless. So, having said that what do you see Visa’s growth going to be I mean it's much motion has possible only is going to help OTIV, have you heard from them yet, or have they are going to do this because you can’t just show up in 2012 and expect everybody not to use cash is going to be a educational process in this. Ohad thank.

Ohad Bashan

Yes, and we are in constant communication with both Visa and MasterCard in terms of the implementation plans. The successful rollout of contract-less payment is heavily depended on both organizations putting the right campaigns and the right infrastructure to support contract-less payment. Our (inaudible) is to provide excellent product, excellent service and stay one step behind them in order to support them in their implementation programs.

Marc Silk - C. Silk & Sons

Okay. And my last question might be little tough for any one to answer. Looking at your stock price which is ridiculous, minus your cash you are trading at half time sales minus your tangible book value you have zero enterprise value which obviously with all your potential that speaks for itself. Over the past year and a half you know (inaudible) also has got 2.5 million shares and [Juvant] has got 2.8 million shares. So, 5.3 million shares between me and some of these hedge funds out there have really been sucking up your stocks and now at least they think the supply and demand will work in our favor. But, you are talking about the getting the profitability it seems like you have a nice track going there, but if you have any hiccups going forward I would hope that you would think outside the box, because I think there is two things that are going to happen to your company. I think somebody might come in, whether it’s a competitor or private equity and try to do hostile bid for your company, and the other part of it is that if your execution comes as we anticipate we are going to have a whole month.

So having said that, to get to the latter as far as the whole month, with every appoint you would take tough decisions whether maybe wondering into areas that you are in is turning to be more of drain of a cash where you might sell that unit, take that money and then focus on your recurring model or maybe looking at other competitors and seeing some of the better sales people and try to poach them, or maybe bring somebody in at the higher management level to give a different perspective. I just think that because the way your stock is trading at and you are getting no enterprise value, I think at some point, even I think your future is bright, I would also hope that you can think outside the box because I know it’s tough on our family business and it’s one that you developed. It is hard to make these decisions, but you also have to think about other shareholders and try to get the best value for your company?

Oded Bashan

Obviously, the only think that we have on our mind is to increase shareholder value and this is the goal of this company. We have clear plans on how to make this company very successful. We have significant opportunities right now in the pipeline. I am not going to go into the analysis that you have thought in terms of how attractive the stock is, because that’s not my goal here. My goal is to make sure that business is properly executed that our strategic plans, our disciplines in terms of financial disciplines in the fundamental of the OTI story are going to be positive or going to be attractive, going to be successful. We will make sure that the operations side is not staying behind -- an inch behind the financials. So from our perspective we have a very clear goal. We are here to successfully execute on the story, we’re here to make all the opportunities that we have in the pipeline successful. Eventually I believe that it will translate into higher share price, but obviously we do not control this, and yes it was a very tough question to answer.

Marc Silk - C. Silk & Sons

I am with you, I think the potential is unbelievable and keep working on it. And then my last is on the SuperCom acquisition. I know we saw a (inaudible) announced at the beginning of the year that’s going to be -- revenues going to be generated in '09. At this stage you can't say that this is been a success or it's like let us give us 12 months then we will know if it successful or not, because you obviously as the shareholder you want to see prove that, that was the right thing to do?

Oded Bashan

I believe, from where I am sitting today, I can tell you that the SuperCom acquisition was a success.

Marc Silk - C. Silk & Sons

Alright, good luck going forward, guys.

Oded Bashan

Thank you.

Marc Silk - C. Silk & Sons

You’re welcome.

Operator

(Operator Instructions). The next question is from [Gary Schwab] of [Valley Forge Capital Management]. Please go ahead.

Gary Schwab - Valley Forge Capital Management

Yes Ohad, I was wondering, could you explain I never really did understand your relationship with the Asian joint venture? And I asked it because I can't remember how far back it was. It was the last quarter of 2006 when you fill up that that project was going to start. But it was in the first quarter of 2007, but you always seems to have confident that it was going to start, and it’s almost like you don’t know what they are doing over there. That's why I was wondering what's your relationship with them?

Ohad Bashan

Gary, as I have explained previously in many occasions, the decision to move this project from the stage it is right now into large commercial roll out is not an OTI decision. The delays are not within OTI faults. OTI delivered everyone that it has to deliver in a successful manner. Obviously, the larger the project is, higher the level of decision is to execute it and to move it from pilot stages into full commercial rollout. When the customer is going to be ready to execute on the commercial rollouts they know that we are here to support them and we are ready from our side.

Gary Schwab - Valley Forge Capital Management

Okay. This is what you always said.

Ohad Bashan

I have to repeat it, because this is an exact situation. Yes, there has been significant delays in this project. We have communicated this. We are absolutely transparent in that regard. We cannot be more transparent than what we are right now.

Gary Schwab - Valley Forge Capital Management

What I say what is your relationship, you are always confident that it's going to happen, it's almost like you are not talking to them, you are sort of guessing that they are going to start to say let's start it. Aren’t you in conversant, how come you don’t know what they are thinking that they were planning on delaying this. It seems like you have no idea what’s going on over there.

Ohad Bashan

Gary from what we can communicate to our shareholders this is what we know and this is what we are communicating. We have already indicated that we are expecting initial orders before the end of year and to build for the commercial production to start next year.

Gary Schwab - Valley Forge Capital Management

What give you confidence this time versus the last three times, what’s your thought? Okay, and just one question on Chevron? What are they doing in Africa because you said they are going to start opening up in the Asia Pacific market? Weren’t they planning on spreading out to Africa before this event?

Oded Bashan

We have not indicated on Chevron’s plan in Africa and what we have indicated is that we are expecting to announce a expansion into Asia Pacific, which flogs is an important milestone with the Chevron relationships.

Gary Schwab - Valley Forge Capital Management

And in Africa, where are they right now?

Oded Bashan

OTI has installations with Chevron in Cameron; this is where we are testing the product.

Gary Schwab - Valley Forge Capital Management

It’s still considered test over there?

Oded Bashan

Not, it’s a test because of the size of it. I mean, you’re talking about Hahnville gas station. That’s not a large project in Chevron’s numbers.

Gary Schwab - Valley Forge Capital Management

So, why are they switching geography rather than expanding where they are?

Oded Bashan

I believe, these are all questions that are valid, but they should not be addressed to me. They should be addressed to Chevron.

Gary Schwab - Valley Forge Capital Management

Don’t they tell you?

Oded Bashan

But they have to respect the confidential information.

Gary Schwab - Valley Forge Capital Management

Okay, alright. Thanks.

Oded Bashan

Sure.

Operator

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

Oded Bashan

Thank you all for joining our call today and we are looking forward to see you in our next call. Thank you all and have a good day. Bye-bye.

Operator

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

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