OMNIQ Corp. (NASDAQ:OMQS) Q2 2023 Earnings Call Transcript

OMNIQ Corp. (NASDAQ:OMQS) Q2 2023 Earnings Call Transcript August 15, 2023

Operator: Hello, and welcome to the OMNIQ Corp’s Second Quarter 2023 Earnings Conference Call. My name is Holly, 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 second 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.omnic.com. During the course of this 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 that light. We urge you to review the company’s Form 10-K, 10-Q and other SEC filings for a discussion of the 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 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 Q2 2023 financial results. First, I would like to take a second and to send our deepest condolences to the family of our esteemed colleague and valued board member, Andrew J. MacMillan, who sadly passed away earlier this week. Andrew joined our Board of Directors in April 2017, bringing within the wealth of experience and expertise in the corporate communications and investment bank in domains. With over two decades of experience in the global securities industry and 18 years of investing in investment banking, Andrew’s influence and insights have been instrumental in shaping our company’s strategic direction. Beyond these professional accomplishments, Andrew was known for its warmth, humility and strong sense of integrity his commitment to mentoring and nurturing talent was a testament to his character and his belief in the power of collaboration.

We will greatly miss him. To start, I’d like to first thank each one of our employees across the entire company for their continued hard work and dedication to our vision and strategic plans. During today’s call, I’ll share with you our financials as well as give you an update on our recent achievements. Our core legacy business services the needs of many of the world’s largest companies. While we remain confident in our continued success and the opportunities ahead, we saw a push out in orders. The temporary delay resulted in $4 million decrease in quarter two of revenue of $20.4 million versus 2022. Despite the challenges in the quarter, we continue to make significant advancements which provide us the ability to reach our yearly objectives and long-term growth plans.

Our dedicated team worked tirelessly throughout the quarter to provide excellent customer service and actively pursue numerous substantial new contracts. We’re confident that these efforts will yield positive results and more than compensated for the $4 million decrease. I’m excited to report that we have continued to see an increase in demand in our AI-based products, which grew by 91%, continuing its strong performance that we have been building upon over the last several quarters. This is exciting as we extend this higher-margin business, which has been met with enthusiasm from both current and potential new customers. As mentioned last quarter, we have begun to take steps to decrease cost and increase profitability, which I will speak about in further detail later on the call.

During the quarter, we made several significant announcements including the following. We announced several purchase orders for our AI-based parking and security solutions, adding an additional three airports, bringing our total airport to 60 in the U.S. These airports include some of the largest in the countries, such as JFK, LaGuardia and Newark, San Francisco, Los Angeles and many more. Our AI machine vision systems is being deployed in South America in partnership with a multibillion-dollar publicly traded high-tech defense and homeland security company. We also announced our AI-based border safety system has been enhanced with real-time anomaly detection. This new technology allows for identification of unusual acceleration of vehicles and the speeds of the vehicles in high-risk areas, enabling authorities to respond immediately to potential threats.

We partnered with EAGL Technology to offer shot detection as an important add-on to our AI-based solution with additional unique features such as the vehicle color, model and manufacturer, essential features for crime and terror prevention. We added new cities to our Safe City system, Q Shield, for a total of 1,900 contracts. We successfully navigated through regulatory requirements and are experiencing positive momentum and expect an acceleration in Q3. I was featured as a guest on the Wall Street Resource Webcast. We recently entered a definitive agreement to acquire Tadiran, a significant development, which I’m excited to discuss further. And finally, just this morning, we announced a significant $50 million project to modernize the supply chain for one of the largest food and drug chains in the U.S. As mentioned on our previous call, as we move through 2023, we continue to 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’re focused 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 taken and continue to take additional cost-cutting measures. As mentioned in our quarterly press release, we continued this process and improve efficiencies initiated this year, resulting in an approximate $1.7 million reduction in SG&A, maintaining our efforts to reach positive EBITDA. And we continue our focus on sales growth of our higher-margin business lines driven by Machine Vision, our patented technology.

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: Thank you, Shai. OMNIQ reported revenue of $20.4 million for the quarter that ended June 30, 2023, which is a decrease of 16% from $24.2 million in the second quarter of 2022. Our gross margin in the second quarter was 19% compared to a gross margin of 25% in the same period of 2022. The decrease in gross margin is due to the fixed cost of goods sold combined with a decrease in revenue. Margin on the direct cost of material was actually higher by 2% in second quarter of this year compared to the second quarter of last year. Total operating expenses for the quarter were $6.4 million, a decrease from $8 million in the second quarter of 2022. Net loss for the quarter was $3.9 million or a loss of $0.49 per basic share compared with a loss of $3.2 million, or a loss of $0.44 million per basic share, for the second quarter of last year.

Adjusted EBITDA, meaning adjusted earnings before interest taxes, depreciation and amortization for the second quarter of 2023, amounted to a loss of $1.5 million compared with an adjusted EBITDA loss of $777,000 in the second quarter of 2022. Cash balance at June 30, 2022 was $2 million compared with $1.3 million at December 31, 2022. For the six months ending June 30, 2023 financial results, OMNIQ reported revenue of $48 million, a decrease of 4% from $50 million in the first six months of 2022. Our gross margin for the first half of 2023 was 20% compared to a gross margin of 24% for the same period last year. Total operating expenses for the six months ended June 30, 2023 were $14.1 million compared with $15.5 million for the same period of 2022, a decrease of 9%.

Net loss for the six months ended June 30, 2023 was $7.4 million, or a loss of $0.95 per basic share, compared with the loss of $5.8 million, or a loss of $0.79 per basic share for the first six months of last year. Adjusted EBITDA, again, adjusted earnings before interest taxes, depreciation and amortization, for the six months ended June 30, 2023, amounted to a loss of $2.4 million compared with an adjusted EBITDA loss of $1 million in the same period 2022. Back to you, Shai.

Shai Lustgarten: Thank you, Neev. Now 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 to a better understanding of the opportunity ahead. First, safe cities. This vertical continues to show impressive progress during this quarter.

We announced several awards in the safe city deployments in South America. We also introduced the new speed functionality, which allows for identification of unusual acceleration of vehicle speeds in high-risk areas, enabling authorities to respond immediately to potential threats with our Q Shield further differentiated itself as one-of-a-kind public safety AI solution. Q Shield is proving to be a major force multiplier operating 24/7, while providing an unbiased approach, eliminating the potential of conflicts that has traditionally occurred. In addition, this solution removes the need for a physical officer by utilizing our proprietary vehicle recognition system and our cloud-based citation management technology. Our solution is unique in both the patented technology as well as the revenue share model that we created and has resulted in both safety benefit as well as revenue generator for the cities we serve.

Q Shield identifies any vehicle driving through a city, which is on the National Crime Information Center database or on the city’s local bureau investigation database. Within milliseconds, Q Shield alerts authorities of potential criminals and if any vehicles are driven unregistered or uninsured. Our initial four deployments have already shown significant benefits to the public, the cities and to OMNIQ. Being an innovative product, OMNIQ is literally inventing the manual for both the deployment and use of our products. As we’ve entered into a new industry with groundbreaking technology, we encountered several learning curves and navigated unexpected regulatory demand, which caused a delay in our deployment. I’m pleased to tell you that these challenges are being successfully addressed, and we anticipate a swifter pace of deployment for the additional 15 cities waiting for their systems.

In addition, we see a continued positive pace of new contracts moving forward as many success stories are shared between different chief of police in several states. With over 22,000 cities across the country, our potential is vast. We have witnessed amazing performance Q Shield in assisting police departments with several of their challenges. For example, Q Shield recently was utilized to thwart a robbery by identifying a vehicle that was registered to an elderly woman while the car was identified by our sensors being driven by a young man with several others in the vehicle immediately identifying an anomaly. With the speed and accuracy our system provides, the police were already en route when the potential aspects entered the parking lot of a legal – of a local gun store and the men were apprehended without the incident.

In another story, one of our cities utilized in our system was able to identify the location of an FBI Most Wanted fugitive, a significant action. While the police on duty were unable to take the fugitive into custody, Q Shield was successful in the identification process and worked precisely as designed. This success has further emphasized the significance of our technology’s capabilities and has resulted in further interest in our product offering. In addition to growing revenue, we’re seeing more of these type of success stories, which are a clear sign that Q Shield’s real-time platform solution would benefit every city within every intersection. Next, supply chain. Our core legacy business services, the needs of many of the world’s largest companies and remain strong.

We remain confident in our continued success and the opportunities ahead, despite the push-out of orders we saw this quarter. We continue to make significant advancements which provide us the ability to – sorry about that. We continue to make significant advancements which provide us the ability to reach our yearly objectives and long-term growth plans. Our dedicated team worked tirelessly throughout the quarter and provided excellent customer service and actively pursued numerous substantial new contracts. We’re confident that our efforts will yield positive results more than compensating for the current revenue decrease. In fact, as you saw in our significant announcement earlier this morning, we have been selected for a $50 million project to modernize the supply chain for one of the largest food and drug chains in the United States.

This project aims to modernize and enlarge the logistics system of this multibillion longstanding customer, the project is for Android-based handheld IoT devices, using managing the customers’ total supply chain level operations within its warehouses, distribution centers and up to point of delivery to their end customer. This application ensures proper timing, routing and proof of delivery, ensuring customer success. The order includes specialized services and support under OMNIQ’s responsibility. Our team has diligently worked over the last six months on many fronts, including these projects, where we focused on design and seamless integration within our customers’ logistics system. Our efforts have culminated in success and take pride in once again receiving a strong vote of confidence from one of the largest and most prestigious corporation worldwide.

The unwavering dedication of our entire company-wide team to meet the ever-evolving demand of our longstanding customers has played a pivotal role in nurturing enduring partnerships. These projects, coupled with our robust pipeline and backlog, will undoubtingly have positive impact on the company’s performance throughout 2023 and beyond. It is important to emphasize that this segment not only provides stable revenue generation but also presents a significant opportunity for us to introduce our AI-related products to these advantages customer base. As we further gradually [Audio Gap].

Neev Nissenson: Shai, are you getting back on?

Operator: Shai, if your line is on mute, please unmute it.

Neev Nissenson: I’m texting him to see if he’s – to let him know that he dropped off the call.

Operator: I’m showing the line is still connected.

Neev Nissenson: Okay.

Operator: Ladies and gentlemen, please remain on the line while we reconnect the good speaker line.

Neev Nissenson: Okay.

Operator: Shai, if your line is on mute, please unmute it, we’re unable to hear you. Ladies and gentlemen, please remain on the line. The conference call will resume momentarily. Ladies and gentlemen, please remain on the line, the OMNIQ event will resume shortly. Ladies and gentlemen, please remain on the line, the OMNIQ event will resume shortly. Thank you for your patience. I think Shai back in the room.

Shai Lustgarten: Yes. I’m sorry. I apologize for that. I don’t know, I was reading to myself actually. But where did we leave off? Neev, where we – where did we…

Neev Nissenson: I don’t actually remember. I think it was before the Tadiran agreement.

Shai Lustgarten: Okay. No problem.

Neev Nissenson: It’s been a while. It’s been a few minutes.

Shai Lustgarten: Yes. Okay.

Neev Nissenson: About seven minutes.

Shai Lustgarten: Okay. I’ll start from – I’ll read again the supply chain traffic management and then go into the Tadiran agreement. And again, I apologize for that. Don’t know what happened, but our line got disconnected. Okay. So to discuss further our supply chain vertical, this is our core legacy business services, that services needs of many of the world’s largest companies and remain – and that business vertical remains very strong. We remain confident in our continued success and the opportunities ahead, despite the push out of orders this quarter. We continue to make significant advancements, which provide us the ability to reach our yearly objectives and long-term growth plans. Our dedicated team worked tirelessly throughout the quarter to provide excellent customer service and actively pursue numerous substantial new contracts.

We’re confident that our efforts will yield positive results more than compensating for the current revenue decrease. In fact, as you saw earlier this morning, the significant announcement that we released, we have been selected for $50 million project to modernize the supply chain for one of the largest food and drug industries companies in the United States. This project aims to modernize and enlarge the logistic systems of this multi-billion longstanding customer. The project is for Android-based handheld IoT devices using managing the customer’s total supply chain level operations within its warehouses, distribution centers and up to the point of delivery to their end customers. This application ensures proper timing, routing and proof of delivery ensuring customer success.

The order includes specialized services and support under OMNIQ’s responsibility. Our team has diligently worked over the last six months on many fronts, including these projects where we focus on design and seamless integration within our customer’s logistic systems. Our efforts have culminated in success and we take pride in once again receiving a strong vote of confidence from one of the largest and more prestigious corporations worldwide. The unwavering dedication of our entire companywide team to meet the ever evolving demands of our longstanding customers has played a pivotal role in nurturing enduring partnerships. This project, coupled with our robust pipeline and backlog, will undoubtedly have positive impact on our company’s performance throughout 2023 and beyond.

It is important to emphasize that this segment not only provides stable revenue generation, but also presents significant opportunity for us to introduce our AI-related products to these advantages customer base. As we further gradually penetrate this market, we anticipate a substantial increase in both our revenue and margins over time. And finally, traffic management. The traffic management vertical encompasses our AI solution tailored for airports, commercial and public parking. As previously mentioned, we have successfully deployed our solution in additional airports, bringing our total to an impressive 60 airports nationwide. This achievement solidifies our viable position in market. This vertical relies on our many channel partners whom we focus on and continue to grow.

In Q2, we saw the growth expand. Our product provides a precise user-friendly and scalable solution, which automates previously manual or non-automated actions. This is significant as it creates efficiencies, a better customer experience and reduces expenses of our customers operations. As evidenced by our 91% growth this quarter, our AI products show continued interest by both existing and new customers, and we look forward to further success in our AI products going forward. Before I conclude and turn this call over to questions, I’d like to discuss our recently announced definitive agreement for Tadiran. As reported in our July 10th press release, we have entered into a definitive agreement with Tadiran Telecomm. Based on reported segment results from Afcon 2022 annual financial statements, Tadiran had revenues of $26 million in 2022 and $1.7 million in operating profit.

Tadiran’s revenue also includes a significant portion of recurring revenue. For 100% of Tadiran’s shares, OMNIQ will pay a total consideration of $15.25 million of which $12.5 million will be paid in cash which is expected to be financed with traditional debt. In addition, $2.75 million of the consideration will be paid in the form of restricted non-discounted common stock. With the addition of Tadiran, we will possess a comprehensive proprietary communication solution that enables us to better serve our customers and complete our solution. Our platform technology utilizes three steps, we sense, identify and act. With the addition of Tadiran, we can now add audio, cellular and Wi-Fi signals to our current sensors which today include camera’s, scanners, RFID and Bluetooth technologies allowing us to analyze the digital data in greater detail and at faster speeds.

This significantly enhances our ability to manage events and mitigate risks at all levels. The new smart automation is a unique solution into our supply chain, traffic management, retail and hospitality customers, allowing us to provide a superior service with more accurate and faster sensing, identification and action. As OMNIQ continues to drive automation for our customers, this acquisition not only allows us to meet the existing organizational communication needs of our current customers but also enables us to create automation through real-time AI communication sensing. This is important as it provides us the capability to identify and respond faster and with greater accuracy. By leveraging the sensing and digitization of communication data and identifying trends at the communication AI level, we can take prompt and precise actions.

This capability is crucial in our commitment to delivering predictive and proactive actions. Our acquisition of Tadiran is a pivotal moment for OMNIQ, as it aligns perfectly with our strategic goals of increasing recurring revenue and enhancing profitability. By expanding our portfolio with Tadiran’s robust business model, customer base, UC&C solutions, and enhanced Safe City offering, we strengthen our market position and unlock new revenue streams. These synergies create opportunities for growth, market expansion, and increased shareholder value. As I have explained, during the quarter, our company continue to see many success despite the near-term challenges that we faced. We believe we are in a solid position to continue with our plans and expectations for the year.

As we continue to ramp sales while continuing to further reduce costs, we are confident in the future of our company and look forward to further success. 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 the questions, I would also like 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 this call over for questions.

Q&A Session

Operator: Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is coming from Jaeson Schmidt at Lake Street Capital.

Jaeson Schmidt: Hey guys. Thanks for taking my questions. So I just want to start with today’s announcement on that $50 million contract. It sounds like this is an existing customer. But can you help us kind of understand how many locations this covers? And if there’s an opportunity to expand further from this level?

Shai Lustgarten: This is actually an expansion. You are absolutely correct, Jaeson of that this is an existing customer that we have very good relationship with for probably I would say 20 years now. And we actually expanded with this contract to – into additional divisions that we have not yet automated with our IoT devices. It does have a more global expansion opportunity that we will continue discussing with them and understand further. Currently, it is nationwide and of course as this been a global customer with a global footprint, then the opportunities that we – once we get more details, we’ll understand better the opportunity.

Jaeson Schmidt: Okay. That’s helpful. And you mentioned that there’s going to be some services and support along with this, but how should we think about any sort of gross margin profile for this contract?

Shai Lustgarten: That’s part of our statement that we discussed where we say that as we grow further into this supply chain market and penetrate further with more services, thus we will grow also our gross margins. And that is a good example of that because we’re adding different services and we’re adding different devices, again, being experts in the solution that allows us to do so. And we are increasing our margin this way. Now, the more – most important thing is that once we are successful, like this success this morning, this – with high volume or high scale contracts enlarging even with one point we did with more. But even with one point on the gross margin, this really is affecting the bottom line significantly because these are high dollar values.

Jaeson Schmidt: Okay. Got it. And then just the last one from me and I’ll jump back into queue. Just curious if you could provide an update for us on the restaurant or retail opportunities you had. I know you’re rolling out at that fast food chain. Just curious where you are in that trajectory?

Shai Lustgarten: Right. So we were – last time, we spoke, we said that we are rolling out slowly with one of the customers. And we also discussed the fact that we have successfully approached additional two customers, at least in that area of drive-throughs. We are currently advancing with the one of the customers that we’ve discussed on our last call and waiting for deployments. We’ve concluded the pilot. We were notified that they’re interested to start the deployment and we are waiting. We came into kind of what they call a quiet period until they can issue the orders which is part of their internal policy as a company. We’re waiting now impatiently actually to start, to receive the information of how many locations they would like us to deploy. That’s the most I would say exciting or news or advancement in that area.

Jaeson Schmidt: Okay. Perfect. Thanks a lot guys.

Shai Lustgarten: Thank you.

Operator: [Operator Instructions] There are no further questions in queue. I will now turn the call over to Shai for any closing remarks.

Shai Lustgarten: Thank you, operator, and thank you all again for your participation in today’s quarterly update. We appreciate you taking the time out of your schedule to better understand OMNIQ’s current and future opportunities. I look forward to speaking to you all on our next call and hope you have a great day. Thank you very much.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.