OMNIQ Corp. (NASDAQ:OMQS) Q1 2023 Earnings Call Transcript May 16, 2023

Operator: Hello, and welcome to the Omni Corp First Quarter 2023 Earnings Conference Call. My name is Jenny, and I will be coordinating your call today. With us on the call are Mr. Shai Lustgarten, Chief Executive Officer; and Neev Nissenson, Chief Financial Officer. Today’s call is being recorded and you should have access to the company’s first quarter 2023 earnings press release issued after the market closed yesterday. This information is available on the Investor Relations section of Omniq’s website at www.omniq.com. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements.

Although, they reflect our current expectations and are based on our best view of the industry and our current expectations, and our business as we see them today, they are not guarantees of future performance. These statements involve a number of risks and uncertainties. And since these elements can change and in certain cases, are not within our control, we would ask that you consider that and interpret them in the right light. We urge you to review the company’s Forms 10-K and 10-Q and other SEC filings for a discussion of these principal risks and uncertainties that affect the company’s business and performance and the factors that could cause actual results to differ materially. OMNIQ undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, unless required by law.

Following the prepared remarks, the company will be taking some questions as time permits. Now I will turn the call over to Shai Lustgarten, CEO. Mr. Lustgarten, please go ahead.

Shai Lustgarten: Thank you, operator and good morning, everybody. Thank you for joining us today to discuss our Q1 2023 financial results. To start, I’d like to thank each one of our employees across our entire company for their continued hard work and dedication to our vision and strategic plan. During today’s call, I’m pleased to share with you our financials, as well as give you an update on our recent achievements since we last spoke not long ago, on our fourth quarter and year-end 2022 call. I’m proud to announce that we experienced yet again record breaking revenues of $27.8 million for Q1 2023, compared with $26.3 million in Q1, and $25 million in Q4 of 2022. Our gross margins increased steadily to 20.5% in the quarter from 16% in the Q4, an encouraging sequential increase.

In addition, we recognized the record revenue from our AI-based business up 88%, following the strong increase of 100% in Q4. Importantly, our gross profits on this business saw a significant improvement as well. Our growth once again came from a diverse group of customers in a wide variety of sectors, including safe city, supply chain, hospitals, restaurants, retail, parking and safety. Our patented technology and platform-based offering continues to be in demand from multiple large verticals who depend on our technology and services to improve their operations and increase safety. During the quarter, we made several significant announcements including several purchase orders from our AI-based parking and security solutions for four additional airports in Texas and California bringing our total deployed airports to 58.

Our Q Shield AI-based machine vision Safe City system added three new cities in Georgia and Iowa, bringing our total cities to 18. We were awarded a multiyear supply contract from Clalit Israel’s largest health organization to produce supply and install self-service patient management kiosks with an estimated value of $3 million. Additionally, we recently announced a purchase order for our AI-based border and public safety system adding a unique feature of real time anomaly detection, which we have successfully deployed into Sensity (ph) varies in the Middle East. I was featured on the Wall Street resource webcast, which is one of the many initiatives we’re taking to expand our exposure to the investment community. And finally, we announced the partnership, which adds gunshot detection technology to our Q Shield AI-based machine vision system.

As mentioned only weeks ago, in our Q4 and year-end call as we move through 2023, we have three focused company initiatives as well as three areas of growth that we believe will drive our company to continued success. First, we continue to sell deeper and wider to our existing Fortune 100 and 500 customers in all three business lines. Second, we focus on the momentum in our deployment of our AI products to existing and newly penetrated markets. And third, an increased focus on generating cash and profitability by taking proactive measures to increase efficiency and drive profitability in our operations. We have now implemented the company-wide ERP system for all operations, which will drive information flow, save costs and improve overall operational efficiency.

We have also taken and continue to take additional cost cutting measures and we continue our focus on sales growth of our higher margin business lines. Before I go further, let me turn the call over to Neev Nissenson, our Chief Financial Officer, who will go over our financial results in more detail. Neev?

Neev Nissenson: Yes. Hello, everybody. Thank you, Shi. As mentioned, OMNIQ reported record revenue of $27.8 million for the quarter that ended March 31, 2023, an increase of 6% on $26.3 million in the first quarter of last year. Our gross margin in the first quarter was 20.5% compared to the first quarter of ’22, which had gross margins of 23.3% Total operating expenses for the quarter were $7.7 million compared with $7.5 million in Q1 of 2022. Net loss for the quarter was $3.5 million or a loss of $0.45 per basic share compared with a loss of $2.6 million or a loss of $0.24 (ph) per basic share for the first quarter of last year. Adjusted EBITDA, meaning adjusted earnings before interest, tax and depreciation and amortization for the first quarter of ’23 amounted to a loss of $0.9 million compared with an adjusted EBITDA loss of $0.2 million for the first quarter of 2022.

Cash balance at March 31, ’23 of approximately $3.2 million compared with $1.3 million at December 21, 2022. Let me turn the call back over to Shai to talk more about our operational achievements and focused goals. Shai?

Shai Lustgarten: Thank you, Neev. Now that we have discussed our first quarter accomplishments, let me shift gears and share more on our plan and what our shareholders can expect as we move throughout the year. While we continue our efforts on all sectors, we remain specifically enthusiastic and focused on three verticals, including safe cities, supply chain and traffic management. As we look at our entire business and with these three verticals in mind, we expect to see accelerated growth and continued strong results as our new orders and backlog remain strong. I will now take a few minutes to expand on each of these three key verticals to allow you a better understanding of the opportunity ahead. First, Safe City. Safe City, as many of you know is driven by Q Shield, our proprietary AI offering that has been labeled by our first customer as the force multiplier.

In addition, this solution removes the need for a physical officer by utilizing our proprietary vehicle recognition system, Veris and our cloud-based citation management technology. The technology operates 24/7, while providing an unbiased approach to eliminating the potential for conflicts that has traditional accord. Our solution is unique in both the patented technology as well as in the revenue share model that we created and has resulted in both a safety benefit, as well as a revenue generator for the cities we serve. Q Shield identifies any vehicle driving through the city, which is on the National Crime Information Center data base, NCIC, or on the city’s local bureau of investigations data base. Within milliseconds, Q Shield alerts the authorities of potential criminals and if any vehicles are driven unregistered or uninsured.

Our strategy started by targeting small and medium sized cities, who see immediate impact from Q Shield. With over 22,000 cities across the country, our potentially is vast. Our momentum continued as we added three new cities. And importantly, our backlog remains significantly stable. In addition, we have expanded the number of states we are penetrating, which adds to our continued belief that this represents an important opportunity of growth and margin expansion for the company. Our initial deployments have experienced great success with impactful revenues collected and distributed. Our solution has proven to have an immediate result in the cities deployed and a strong ROI and we have seen a steady improvement in both number of citations issued and collection rates.

Next, supply chain. We’re proud to reiterate our long-standing and unique relationships with our loyal customers, many of whom have placed their trust in our company for over two decades. These customers rely on us to manage their supply chain operations and address their — and address any challenges. Their continued partnership serves as a testament to their confidence in our capabilities. This ever-expanding segment forms a solid foundation for our business as we effectively cater to numerous companies, including some of the largest entities globally, notably it’s team clientele includes Fortune 50, 100 and 500 companies. We are pleased to report that we continue to witness significant orders from these valued customers, resulting in a growing backlog of business.

It is important to emphasize that this segment not only provide stable revenue generation, but also presents a significant opportunity for us to introduce our AI-related products to this advantages customer base. As we gradually penetrate these markets, we anticipate a substantial increase in both our revenues and margins over time. During the quarter, we achieved the successful launch of a pilot program in collaboration with one of the largest distributors in North America. The primary objective of this initiative is to ultimately eliminate the need for handheld devices by implementing a new architecture. In Phase I, we trained employee to utilize revolutionary heads-up display system, thereby eliminating the reliance on traditional methods.

These innovative display and power users to seamlessly identify products, locations and quantities. Initial feedback from the pilot program has been positive, prompting the customer to request testing at two additional locations. And finally, traffic management. This vertical encompasses our AI solution tailored for airports, commercial and public parking as well as our HLV solution. As previously mentioned, we have successfully deployed an additional four airports, bringing our total to an impressive 58 airports nationwide. This achievement solidifies our enviable position in the market. Our pioneering cloud-based parking system known as PERCS, continues to gain substantial traction powered by our advanced vehicle recognition AI, PERCS revolutionizes parking operations by digitizing traditionally labor intensive and time consuming tasks.

This innovative model provides a precise user friendly and scalable solution. Notably, this sector experienced a significant increase in revenues during the quarter and we anticipate sustained robust growth moving forward. In conclusion, we are pleased to report that we have started the year according to plan. Our business has witnessed consistent sales growth resulting in record breaking revenues across all fronts, particularly in our AI-based business offering. Furthermore, we have maintained a strong emphasis on improving our margins and generating cash as evidenced by the significant improvement from our performance in Q4. We are resolute in our commitment to sustaining this positive trajectory. As we carry forward with our momentum, our focus remains crystal clear and our approach remains disciplined.

We remain dedicated to the initiatives and segments that have been outlined, ensuring that we allocate our resources effectively and capitalize on the opportunities before us. By adhering to our strategic road map, we are confident in our ability to drive continued success and maximize shareholders’ value. As we turn the call over to questions, I would like also to extend my sincere thanks to our loyal customers and suppliers, our professional team and other strong supporters. Finally, we would like to thank our shareholders for their trust in us, as well as wish you all continued success. Operator, I’ll now turn over the call for questions.

Q&A Session

Operator: Thank you, Shai. At this time, we are opening the floor for questions. Your first question is coming from Jaeson Schmidt of Lake Street Capital. Jaeson, your line is live.

Jaeson Schmidt: Hey, guys. Thanks for taking my questions. Shai, I just want to start with the Q Shield product. And I know you noted winning a city in Iowa. Previously, it seemed like you were concentrating sort of in the southeastern portion of the country. Just curious, when you look at the Q Shield pipeline, how many states are within that pipeline?

Shai Lustgarten: 12.

Jaeson Schmidt: Okay. And then when we look at the Q Shield ramping going forward, can you remind us what sort of is the target number by the end of this year?

Shai Lustgarten: Yeah. We’ve been talking about before between 35 to 40, Jaeson, if you remember in the last call, of course, when we say we have 12 — going back to your previous question, when we are exposed now to 12 more states, which is really significant exposure for us quickly happened then you can expect more than that number more than 35 to 40, but we’re learning. We’re seeing how the current deployments are very successful in what we have to do further in the Q Shield product. We feel very comfortable with the number we provided. And hopefully, we’ll be able to exceed that because of the huge exposure now that we have.

Jaeson Schmidt: Okay. That’s helpful. And then I thought the recent announcement on incorporating gunshot detection technology was really interesting. I know it’s still early, but curious if you could provide what sort of feedback has been from customers?

Shai Lustgarten: So like you said, it’s exciting for us as well. It’s a completing solution for Q Shield and actually increases the audience that we can market Q Shield too, and we just started that. The feedback from the testing and integration internally before customers internally is very strong. We can do more things, be relevant to more use cases, and that is internally from our testing in the field together with our partner. With customers from their end, our partners and we see increased interest. And of course, that also increased our exposure for Q Shield due to the fact that we have more resellers now and ones that bring back opportunities. But — we haven’t deployed it yet. We finalized testing. The feedback we’re getting is positive and we continue to think that’s going to be a significant, I would say, pillar in marketing and exposing Q Shield out there.

Jaeson Schmidt: Okay. That’s helpful. And then just the last one for me and I’ll jump back in the queue. Gross margin had a nice jump sequentially but still down year-over-year. Just trying to think about how gross margin should trend the rest of this year with some of this AI product continuing to ramp?

Shai Lustgarten: Yeah. You need to remember that — well, in the first year, we did show sequential growth in gross margin. But then again, when we started the investments into the AI products and the algorithm design and the spending into penetrating to the markets today, we generate revenues from that, as you mentioned, that indeed reduced gross margins. But to answer your question, we are still on track with our target for profitability, especially for this year to show the trend going towards that and continue enlarging the gross margins. We’ve mentioned that we’ve seen good results in that already in our AI products. I’m happy to say it’s about even 50% today. And as we continue to grow that exposure of Q Shield parking and the additional solutions we sell AI products to these markets that are relevant to this technology as we continue to add growth — we will certainly — you will certainly see the continued growth, of course, margins every quarter.

Jaeson Schmidt: Okay. Appreciate the color. Thanks a lot, guys.

Shai Lustgarten: Thank you, Jaeson. Appreciate your support.

Operator: Thank you very much. Your next question is coming from Pavlina , she’s a Private Investor.

Unidentified Participant: Hi, Shai.

Shai Lustgarten: Hello. Hi.

Unidentified Participant: Hi, Shai. My name is Pavlina. I’m a Private Investor. Congratulations on the record quarterly revenues. And I also have a couple of questions on Q Shield. I see that you already deployed it in 13 cities, if I’m not mistaken. Can you explain the revenue model? And is there an advanced investment necessary? How soon do you think it will start making profit?

Shai Lustgarten: Thank you very much for the question. Pavlina, we’ve — yeah. We have 18 cities under contract. We deployed the first — in the first cities, we deployed Q Shield in. We’re seeing tremendous effect in — not only in the revenues, but of course, that come from the citations and business and the revenue business model that we are using there. But we’re seeing tremendous immediate effect over the — creating the safety in these cities. They are now really as they — as the first city informed after deployment when they called and named Q Shield as a significant force multiplier we’re seeing that effect in all the cities once Q Shield is turned on and used. The reason is, you make the invisible visible in one second.

Once you click on the power on Q Shield, make it work throughout the city or even limited intersections in the city, you immediately see the enforcement of security, you immediately can start managing instead of getting managed or being managed and start getting results in ROI that is even one day sometimes. So that is the effect and feedback we’re getting from the deployments we have currently. And the revenue business model, revenue share business model that you were asking about, that is very simple. We put Q Shield aside from excluding very limited, low installed — installation cost that the city is sharing with us. We’re providing Q Shield for free. And we deploy Q Shield, we put our sensors in the field. And once the city starts operating and using Q Shield, aside from providing to them all the amber alerts, all the silver alerts, tolling vehicles, criminals, whatever, all these notifications that Q Shield provides every second, we’re also detecting if any vehicle is registered, not registered or insured or not – or uninsured in our system, Q Shield can immediately online in second sent to the violator and we share a percentage of that citation fee together with the city.

We process the payment. It is going through our bank account and we pay every month the city their share of the revenue.

Unidentified Participant: Thank you. And if I have time for another question. How good do you see the cooperation between the different companies in OMNIQ?

Shai Lustgarten: Yeah. We — very simple consolidation because again, the Dangot acquisition had coming from the space we operate in, it’s not a different space. So very simply integrated and consolidated and working very nicely. By the way, just to get back to your previous question, you asked also about the profitability. When is it going to get profitable. So when we measure a Q Shield on a stand-alone basis, we’re seeing profitability already and a very nice one, growing one as well. Back to the current question, consolidation was done. Dangot is part of the team. We’re sharing product line. We’re doing cross-sell and we’re learning every day to do that even better.

Unidentified Participant: Thank you so much. Good luck for the – next of the year.

Shai Lustgarten: Thank you so much Pavlina. Appreciate that. Thank you.

Unidentified Participant: Bye.

Operator: Thank you very much. We don’t appear to have any further questions. I’m going to hand back to Shai for any closing comments.

Shai Lustgarten: Thank you, operator, and thanks again, everyone, and I’m looking forward to our next call. All stay safe and thank you very much.

Operator: Thank you, Shai. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.