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Edited Transcript of OTIV earnings conference call or presentation 13-Mar-19 1:00pm GMT

Q4 2018 On Track Innovations Ltd Earnings Call

Rosh Pina Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of On Track Innovations Ltd earnings conference call or presentation Wednesday, March 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Assaf Cohen

On Track Innovations Ltd. - CFO

* Shlomi Cohen

On Track Innovations Ltd. - CEO & Director

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Conference Call Participants

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* John Nobile

Taglich Brothers, Inc., Research Division - Principal Equity Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* William Tennent Gibson

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Ehud Helft

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to On Track Innovations Fourth Quarter and Full Year 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

You should have all received by now the company's press release. If you have not received it, please review it on the IR section of the company's website or contact the investor relations, GK Investor & Public Relations.

I would like to now hand the call over to Mr. Ehud Helft of GK Investor & Public Relations. Mr. Helft, would you like to begin?

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Ehud Helft, [2]

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Yes. Thank you, operator. Welcome to On Track Innovations Fourth Quarter and Full Year 2018 Conference Call. I would like also to thank management for hosting this call.

With us on the line today are Mr. Shlomi Cohen, CEO; and Mr. Assaf Cohen, the CFO. Shlomi would provide some of the recent key highlights, and Assaf will be review OTI's financial performance of the quarter. Following the prepared remarks, we will then open the call for the question-and-answer session.

Please be advised that the safe harbor statement in the press release issued earlier today also pertains to the content of this conference call.

And with that, I would like now to hand over the call to the company's CEO, Shlomi Cohen. Shlomi, go ahead, please.

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [3]

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Thank you, Ehud. Welcome all, and thank you for joining us today. Following years of hard work and following our efforts during '18, OTI has taken another step to profitability by cutting our net loss by more than half to the minimal amount of USD 263,000. This achievement, together with the fact that we dramatically decreased our debt to almost 0, put us in a much better place than we have ever been in our history. I believe that 2018 overall marked a true turnaround year for OTI.

As we progress through 2019, we have all the ingredients in place to really start enjoying the fruits of our turnaround effort over the past few years. And as you will hear -- excuse me for a moment -- okay, you will hear about, I'm optimistic about our ability to show solid revenue growth for 2019 as a whole.

Looking at the year as a whole, we reported revenue growth to USD 21.9 million, of which an increasing portion, 24% of total revenue, is higher-margin recurring revenue. This allowed us to show gross spending improvements towards potential profitability, given our better gross margin profile as well as our now increasingly efficient and stable expenses footprint. Furthermore, we reduced our adjusted EBITDA loss from continuing operation for the year to $356,000 versus a loss of USD 673,000 in '17. As the recurring revenue portion continued to grow, we are well positioned to enjoy the more predictable growth that recurring revenue will provide us with.

I would like to focus on our strategic progress. In December, we sold our noncore MediSmart activity, as you know. We have in place a long-term strategy to improve the business by fully focusing our sales and R&D efforts on our core technology. This sale will bolster our balance sheet, which has already strengthened nicely over 2018, with an additional USD 2.75 million added to our cash position. To place that in perspective, at year-end 2018, we had close to $6 million in cash with debt of close to 0 at only $0.3 million.

Towards the end of Q3 2018, we started to face the new tariffs that were presented by the U.S. administration on goods delivered from China to U.S market -- to the U.S. market. This 10% tax temporarily affected our ability to continue with our positive revenue momentum in the U.S., which had shown until Q3 2018, and as a result, we faced a revenue decrease during Q4 from the United States.

We believe that the tariffs will also affect our Q1 2019 results. In order to mitigate this, in the past few months, we have internally started working on relocating our production site outside of China. We expected to complete this project by the end of Q1 2019, and we strongly believe that once this process is over, we will continue and even accelerate our positive revenue momentum during 2019. While it is indeed short-term negative, it is temporary and doesn't change the bigger turnaround picture, and we expect that the overall improvement in our business throughout 2018 will continue throughout 2019 and beyond.

In fact, prior to Q4, 2018 was overall successful year for the -- for us in the U.S. and globally. We delivered 10,000 readers to the U.S. payment kiosk market and more than 16,000 advanced contactless reader for smart ATMs.

For a sales footprint perspective, 2018 was an important year in which we made progress on several fronts, which steps -- which set us very well for 2019 and beyond.

We're especially pleased with our international expansion in the retail and mass transit segments. In 2018, we delivered more than 11,000 advanced contactless reader to the Russian retail self-service market. The most important developments for us was the achievement of new certification in Russia, a payment system established by the Central Bank of Russia.

In October, we achieved Interac certification, one of Canada's leading payment brands. Our certification allows Canadian business to integrate our secure cashless payment solution into vending machines, kiosks and other unattended devices throughout the country.

Both the Canadian and the Russian certifications are important, significantly expanding our potential by growing our total addressable markets.

During 2018, we delivered more than 5,000 advanced system to the Japanese market, and these systems are generating recurring revenue for OTI.

Another key growth area for the company in the automated retail space is smart ATMs. In 2018, we delivered more than 16,000 advanced contactless readers, up 60% year-over-year, and we expect to continue to increase sales and deployment around the world in 2019.

I would like now to turn the call over to our CFO, Assaf Cohen, to summarize the financial results for the fourth quarter and 2018 as a whole. Assaf?

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Assaf Cohen, On Track Innovations Ltd. - CFO [4]

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Thank you, Shlomi. Good morning, everyone. Before the market opened today, we issued the results of our fourth quarter and year ended December 31, 2018, in a press release. The copy of the release is available in the Investor Relations section of our website.

I will just cover some of the main financial highlights to provide additional color. I will be covering some non-GAAP metrics, including adjusted EBITDA from continued operation. We believe this provides a good understanding of our ongoing performance. Please see the earning release on our website for further details about this non-GAAP metric, including a reconciliation of adjusted EBITDA to our comparable GAAP results.

In addition, as you know we announced the sale of MediSmart in December. The result of MediSmart are therefore included as discontinued operation and all the prior period information has been reclassified to conform with the current period presentation.

Revenues in the fourth quarter of 2018 were $4.5 million compared with $6.3 million in the fourth quarter last year. As Shlomi explained, the lower level of revenues was due to the impact of import tariff of products manufactured in China. In addition, in the fourth quarter, we had a lower level of revenues from APAC. We have taken steps to mitigate the tariff issue, which should be completed by the end of the first quarter of 2019. Full year 2018 revenues were $21.9 million versus $20.9 million last year.

In terms of breakdown of where revenues were derived. For the fourth quarter, retail and mass transit ticketing revenues were $3.2 million or 71% of sale, and petroleum revenues were $1.3 million or 29% of sales. For 2018 as a whole, retail and mass transit ticketing revenues were $16.6 million or 76% of sales, and petroleum revenues were $5.3 million or 24% of sales.

Looking at geographic breakdown in the fourth quarter, the Americas accounted for $1.5 million or 34%, Europe was $2.1 million or 46%, Africa was $0.6 million or 13% and APAC was $0.3 million or 7%. For '18 as a whole, the Americas accounted for $7.9 million or 36%, Europe was $8.4 million or 39%, Africa was $2.5 million or 11% and APAC was $3.1 million or 14%. Compared with last year, we grew revenues by 10% in the Americas and 15% in Europe.

Recurring revenues in the fourth quarter accounted for $1.2 million, which is 26% of total revenues, compared to $1.2 million or 18% of total revenues. For the year, recurring revenues accounted for $5.2 million or 24% of total revenues compared to $4.6 million or 22% of total revenues.

Gross margin in the fourth quarter was 48%, a solid improvement over the 46% reported in Q4 last year. For the year, gross margin was 51%, also ahead of the 50% reported last year.

In the fourth quarter of 2018, operating expenses were $3 million versus $3.5 million in the fourth quarter of last year. For 2018, our expenses increased slightly to $13.1 million versus $12.6 million last year.

Net loss from continuing operation in the quarter was $862,000 or a loss of $0.02 per share. This is compared to a loss of $627,000 or a loss of $0.02 per share in the fourth quarter of last year. For the year, we reported a net loss from continuing operation of $1.9 million or a loss of $0.05 per share compared with a net loss of $2.4 million or a loss of $0.06 per share in 2017.

We had a net income of $533,000 or positive $0.01 per share in the quarter versus a loss of $693,000 or a loss of $0.02 per share in the fourth quarter last year. For the year, we reported a net loss of $253,000 or a loss of $0.01 per share versus a loss of $598,000 or a loss of $0.01 per share in 2017.

Now turning to our non-GAAP results. Adjusted EBITDA in the fourth quarter of 2018 was a loss of $471,000 compared with an adjusted EBITDA loss of $204,000 in Q4 2017. For 2018 as a whole, we reported an adjusted EBITDA loss of $356,000, a solid improvement over the adjusted EBITDA loss of $673,000 in 2017.

Looking at our balance sheet. OTI ends 2018 in a solid position with a strong debt reduction. At year-end, cash, cash equivalents and short-term investments was $5.9 million and short- and long-term debt was $0.3 million, giving us a net cash position of $5.6 million. At year-end 2017, we had $10.1 million in cash, cash equivalents and short-term investment and $5 million in debt.

This completes my financial summary. For a more detailed analysis of our financial results, please refer to our annual report on Form 10-K, which we plan to file by March 29, 2019.

And now I'd like to hand the call back to Shlomi.

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [5]

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Thank you, Assaf. While it has taken time, our strategy of transitioning from a pure product company to a solution company that utilizes software in the cloud, offering complete turnkey solutions is going and working -- is ongoing and working. This strategy is providing us with a stable customer base with ongoing higher-margin and predictable revenue stream. As a result, it is worth emphasizing a few important changes.

One, our recurring revenues are now 24% of the overall pie versus 22% last year, an increase of 12% in absolute terms, and we are counting to focus our energies on increasing this portion.

During Q4, our recurring revenue reached to 26% of our total revenue compared to 18% for the same period a year ago. Our revenue in the Americas grew year-over-year by 10%.

Looking ahead into 2019, while our first quarter will be a slower one as we transition our manufacturing out of China, which would be completed by the end of that -- of this quarter, we are very excited with regard to our potential. All the hard work and energies we have put in over this past few quarters and years will really begin to pay off in 2019, and we expect to see solid revenue growth for the year as a whole. Furthermore, we don't expect any real change to our OpEx level, so we hope that much of this growth can reach and will improve our bottom line.

In summary, I believe we are well positioned in 2019 to enjoy the fruits of our past efforts and look forward to renewed shareholders' value creation over the long term.

With that, I would like to open the lines for Q&A. Operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from William Gibson of Roth Capital.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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In regards to your manufacturing, what percent of that is out of China? Is it 100% or less? And then a follow-up to that is, where are you moving it to?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [3]

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Okay. So I would say that almost 90% of our production is actually done in China, and we are actually relocating the production from China to the Philippines. The fact that it's creating impact on Q3 -- on Q4 results, it's mainly regarding the fact that the U.S. market is the biggest market that we're having. More than 1/3 of our revenue is actually generated in the U.S. market.

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Operator [4]

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Our next question comes from John Nobile of Taglich Brothers.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [5]

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I just wanted to get back to the manufacturing operations moving from China to the Philippines. Just wanted to get an idea of how this is going to impact the first quarter? Like you said, the fourth quarter was impacted by this, and just trying to get an idea of the magnitude that this could impact the first quarter because it won't be really fully operational out of the Philippines, I think till the end of the first quarter. So looking at it, I know that you had, let's see, about a 28% decline in the fourth quarter revenues. Should we look at a similar type of decline, a temporary decline, obviously, in the first quarter this year or more or less than that?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [6]

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Okay. So, yes. Look, I will say the following: first of all, by the end of this month, we are going to complete the entire handover from China to the Philippines. And from this moment, we will start to do the ramp-up in order to do the recovery that we were facing in the last 2 quarters, this is one. Second thing, to tell you right now what will be the impact on Q1, it's a little bit early because we are still working around the clock in order to deliver any purchase order that we have globally, and especially to the U.S. market. And we are trying to be creative in order to see what we can do legally in order to bypass this 10% tax. But I think it's too early at this point of time to speak about the final results of Q1. I think that it's a -- in few weeks, we will have much better picture, and later on, we will share it with the market as well.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [7]

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Okay. And the move to the Philippines, I was wondering if you could give us an idea of how the labor cost is there compared to the labor cost in China.

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [8]

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Okay. This is interesting point, we were having a discussion on that internally. Today, when you're looking on the Chinese market compared to other Far East markets and even in East of Europe, those markets that I mentioned, they are competing with the Chinese market. So from cost perspective, we are not going to face any kind of change. In sold product, we will be able even to improve our gross margins. So all in all, from -- again, I'm saying from cost perspective, it's going to be the same, or in some cases, even better.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [9]

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No, great. That's a very strategic move on your behalf there. And I was hoping that you could talk a little bit about your partnership with Puma Energy. I know there was a press release not long ago about that. Just trying to get an idea of the size of this, the potential, what you believe that, that could actually contribute to your top line in 2019 and beyond.

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [10]

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Okay. So to the audience that are not familiar with the Puma PR, it's related to our fueling business and the automated fueling activities that we're having. To your question, I will say the following: this is, first of all, a high-gross-margin account that is just strategic for us because over there, we are not selling product, we are selling solution. Revenue wise, during the coming years, it should be a significant one. We're that -- we're now doing the ramp-up, and the idea is to accelerate the activities globally because Puma is a global player in the energy sector, and those guys are actually stepping to many countries with this new technology from OTI.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [11]

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Okay. So you're not selling product on this account. Does that mean we should look at this going into your recurring revenue licensing and transaction fee line?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [12]

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Again, I'm -- because we are still in the implementation phase, I prefer to not give you a direct answer. But all in all, when you're looking on accounts such as Puma or BP or other multibillion-dollar accounts that we are having in this sector, eventually, it's reached to this point as well.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [13]

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Okay. And with the divestiture of MediSmart already in the books, it's completed, what impact, if any, do you think that this is going to have on your margins and operating expenses going forward?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [14]

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First of all, I think that you can see already the impact on our gross margin. The gross margin without MediSmart is 51%. And if you -- if we were keeping MediSmart, it was 52%. But again, strategically, we took a decision 4 years ago when I came onboard, and the idea is to focus only on the core technology and core business. MediSmart was not part of it. But for the long run, you will see that the fact that we are not dealing with MediSmart, we are less investing in R&D and other operations activities. The company, today it's much more focused because this is related to the entire strategy that I'm having since I came onboard when we stepped out also from easy power, the access control and lately from MediSmart. All of those activities were not part of our core technology and core business.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [15]

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Okay. And I just have one further question. I was hoping you could talk a little bit about how that MIR certification in Russia and the Interac certification in Canada, how this might benefit your sales to these regions? Get a little more insight into this, please.

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [16]

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Yes, absolutely. So regarding MIR, MIR was also -- first of all, I'm -- maybe from the beginning. We identify that the Russian market is a strategic market. And from the moment that we understood that the potential over there is relatively significant, we decided to invest efforts in order to get the MIR certification. And I think that from the moment we got the MIR certification, we started with sales activities over there. And so far, we've delivered, in relatively very short time, more than 11,000 advanced contactless reader to the Russian market. I'm expecting, by the way, that in the first half of this year, we will see a continued strength, meaning that we will keep the positive momentum in the Russian market and we will see more positive results like we saw in the second half of '18.

The Russian market, by the way, is now moving quite fast. Compared to the other parts of Europe, this market is growing faster. And they are injecting more and more cashless system to the payment markets, and OTI want to take some market share in this respect.

Regarding Interac, we don't have direct activities at this point of time in the Canadian market. But -- and this is the reason, was the incentive for us to get the Interac certification, it's related to our partners in the U.S. market that they are actually active in the Canadian market. And in order to support them with their Canadian activities, we decided to get the Interac certification. And I believe that we will see the results of this achievement during 2019. It's going to impact the revenue of each and almost every partner that we are having in the U.S. market that they are active also in the Canadian markets.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [17]

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Great. So nothing yet, but this will definitely open up some doors -- revenue potential for 2019, you believe, in Canada from here?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [18]

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Absolutely.

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Operator [19]

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Our next question comes from [Marty Elbaum] of Horizon Networks.

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Unidentified Analyst, [20]

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I wanted to find out what your thoughts were about the NASDAQ listing. What do you plan -- are we in jeopardy now? Or is there a solution to the problem?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [21]

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Look, we -- first of all, we got a notice from the SEC, and we have time until April 22.

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Unidentified Analyst, [22]

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Until when? We have until when?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [23]

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April 22. And basically, I think that it's needless to say that we are investing a lot of efforts in order to reflect the company results in the market as well. But we have a few other options that we consider assuming that we will not be able to reflect it correctly. I don't think that we need to get into details in this -- in the conference call now, but the company is doing almost every step that is relevant in order to change this situation.

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Operator [24]

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Our next question comes from Mike Latimore of Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [25]

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As we look to fiscal '19, can you talk a little bit about what are the top revenue drivers here maybe by maybe the top 2 regions and the 2 top use cases, whether it's ATM or vending, that sort of thing? Just give a sense of the top drivers this year.

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [26]

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Sure. If I would start from the verticals, I will say the following: first of all, definitely, we will continue with the positive momentum that we are having with the ATM. Just as a reminder, in 2017, we were selling 5x more compared to '16; and in 2018, we were growing this vertical by 60%, from 10,000 to 16,000 advanced contactless reader to the smart ATMs. So this is regarding vertical number one.

Vertical number two here, I'm having little bit some kind of a challenge to position which one will be interesting for us. But I will say, definitely from volume perspective, no need to mention the fact that the vending, we'll continue to be #1. But I am putting a lot of efforts and attention on very interesting vertical that we are having, and this is actually the EV charger, the electric vehicle chargers. First project that we're having, and it's already active, it's actually in the City of London. That over there, you can already see EV chargers in the streets with contactless reader on the face of the EV charger and a telemetry unit inside that connects the 100, or I think that today it's even more than that, to the cloud via our system. And I believe following the fact that the number of electric vehicles in the market is increasing dramatically, this vertical in OTI will increase as well. And we are doing quite a lot of efforts almost in every region in order to generate positive results on the EV charger. At the moment, yes, it's not the biggest vertical that we are having, but for us, it's going to be a strategic one in the next few years.

From a region perspective, needless to say that U.S. will continue to be #1 also in 2019. But definitely, the Japanese market, the Russian market, they are going to follow the U.S. market as well. I hope that I give you an answer for your question

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [27]

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Yes. And then did you say in the fourth quarter, you saw a little bit of weakness in the APAC region? Is that what you said? And if so, what was the cause?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [28]

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No, again I will say in Q4, after very positive momentum that we were having in the 3 first quarters, just to remind you, by the way, when you're look looking on quarter 1, 2, 3, each of them was better year-over-year compared to the previous quarter. Unfortunately, the U.S. administration came with the new tax on any goods delivered from China to U.S., and it created a negative impact on our activities in the U.S. market. And that's the reason that we are actually relocating our production from China to the Philippines. And by the end of this month, by the end of this quarter, this hand over will be completed, and I hope that we are actually giving a clear answer to this temporary event.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [29]

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Okay. So orders out of the APAC region were as expected?

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [30]

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Yes, yes, because when you are look, APAC, for us, it's mainly Japan, it's 95% Japan. And Japan, by the way, year-over-year, you can say that in '18, we were selling more than in -- than '17. So for us, we were able to deliver all the planned system to Japan, I think in the first half or during the 9 -- the first 9 months in 2018.

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Operator [31]

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(Operator Instructions) There are no further questions. I will now turn the call back over to Shlomi Cohen for closing remarks.

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Shlomi Cohen, On Track Innovations Ltd. - CEO & Director [32]

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Thank you. On behalf of the management of OTI, I would like to thank you for your continued interest and long-term support of our business. In the coming weeks, we intend to -- actually, it's next week, we are going -- we attend the Roth Conference in California, and I look forward to meeting with some of you over there. If you would like to set up a meeting with me, please contact me or the IR agency, GK, at any time. Thanks again, and have a good day.

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Operator [33]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.