OMNIQ Corp. (NASDAQ:OMQS) Q3 2022 Earnings Call Transcript

OMNIQ Corp. (NASDAQ:OMQS) Q3 2022 Earnings Call Transcript November 15, 2022

OMNIQ Corp. misses on earnings expectations. Reported EPS is $-0.52 EPS, expectations were $-0.31.

Operator: Hello and welcome to the OMNIQ Corporation’s Third Quarter 2022 Earnings Conference Call. My name is Ali, and I will be coordinating your call today. With us on the call are Mr. Shai Lustgarten, Chief Executive Officer, who will provide an operational overview; and Neev Nissenson, Chief Financial Officer, who will discuss financial results. Today’s call is being recorded and you should have access to the company’s third quarter 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. I will now take a brief moment to read the Safe Harbor statement. During the course of this conference call, we will make certain forward-looking statements.

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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 guarantee 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 and interpret them in that light. We urge you to review the Company’s Form 10-K 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. And now I will turn the call over to Shai Lustgarten, CEO. Mr. Lustgarten, please go ahead.

Shai Lustgarten: Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss our Q3 and nine months 2022 financial results. I will begin today’s call with a brief discussion of the Q3 results and then give you an update on the key achievements we recognized during the quarter. I’ll then turn the call over to Neev Nissenson, our Chief Financial Officer, and he will provide details of both the Q3 and nine months ended 2022. We will finish by giving you a clear understanding of our future focus and potential opportunities across the globe. It is my hope that after today’s call, you will have an even better idea of why we are so excited about our business fundamentals going forward. 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.

I’m proud to report that Q3 revenue came in at $27 million, a record high sales number for the company bolstered by organic growth of 32%. Our gross profit saw a 28% increase, compared to the third quarter of 2021. Importantly, our AI revenue saw an increase of 50%, compared to the third quarter of 2021. This led to a $1.5 million improvement of adjusted EBITDA for the quarter. This growth was driven by strong customer demand across all our segments, which resulted in improved bottom line in the path to profitability. During the quarter, we also announced several positive achievements including OMNIQ named Total Solution Partner for one of the largest global leaders in enterprise asset intelligence for robotic supply chain management. We announced the follow-on order for our AI-based machine vision system for a major U.S. fast food chain with more than 800 locations and for an automotive related retailer with over 1,000 stores in the U.S. We announced the receipt of an approximately $10 million purchase agreement for intelligent healthcare cards from Israel Ministry of Health.

We further announced the receipt of a purchase order to deploy our AI-Machine Vision Solution in what is now the 50th North American major Airport using ONMIQ’s AI product. ONMIQ’s healthcare product penetration success continues with having our self-service patient management kiosks featured in Israel’s newest State-of-the-Art emergency medical hospital. I would like now to focus on this breakthrough into the QSR and retail sector as we consider it as a potential game changer. Our proprietary patented AI-based Machine Vision Technology provides accurate, human less object identification in this case identifying cards, including the color, make, and license plates. Historically, this information is vital for security law enforcement, automation of parking and traffic management.

However, we identified that the QSR retail sector, which have thousands of locations lacking information about their customers and their consuming habits is a significant potential market opportunity for us. By installing our AI products in drive throughs or the entrance of the business, the system immediately identifies and presents invaluable information about the customer. Once the customer profile is built, the business owner will know things such as when the customer last visited, what they usually order, how many times they visited in the past, are they eligible for any discounts or rewards and so on. For the first time, we enabled the largest companies to collect and use information about customer habits that have never been able to be effectively collected until now.

Thus create automation as we replace manual processes with machine to machine ones, which result in significant efficiencies. According to a study conducted by Quantum Advisors, there are approximately 200,000 quick service restaurants in the U.S. alone. Most are blind in knowing their customers. You can imagine now what type of potential impact this could have in the retail and restaurant sector, as well as on OMNIQ. In addition to the QSR, other orders came from automotive retailer with over 1,000 sites similar to the QSR any car that drives into the retailer’s premises is identified and immediately alerts the service provider allowing them to know essential information on each individual customer ahead of time. This instantly shortens the turnaround and increased throughput.

There 1,000s of additional automotive service provider locations in the U.S. that we have targeted. OMNIQ continues to enjoy significant growth with our long standing Fortune 500 customers, many of whom have relied on the company for 20-plus years to handle their logistics and supply chain challenges. These longstanding relationships with a solid stability of our legacy products is the basis for one of our most significant growth engines, upgrading our Fortune 500 customer base to our AI product. Q3 was characterized by the addition of new customers within the traffic management, public safety, retail and restaurant sectors. Our safe city product Q Shield announced only nine months ago, he is continuing to show success. Q Shield is becoming a law enforcement platform as a crime investigation tool and real time crime prevention tool.

As we aim to do, it helps municipalities keep the resident safe, reduce time and through our creative business model, Q Shield is offered, it increases the talent’s income that is now invested back into the communities. This new initiative already has 12 cities in the U.S. and we continue to see growing pipeline of cities interested in deploying Q Shield. While we do not provide guidance, demand is stronger than we had anticipated and our team is busy executing. As noted Q Shield’s business model is based on recurring revenue sharing with significantly higher margins than the current corporate average. Thus, we expect this strength to result in a positive impact to both the top and bottom lines. Before I go further, let me now turn this over to Neev to take a deeper look into our financial results.

Neev?

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Neev Nissenson: Yes, hello, everybody. As Shai highlighted in Q3 OMNIQ reported revenue of $27 million for the quarter ended September 30, 2022, an increase of 32% from $20.5 million in the third quarter of ’21. The revenue growth is organic as we already consolidated our financial statements with Dangot Computers for Q3 of 2021 as we acquired Dangot in the beginning of July. Total operating expenses for the quarter were down 3% to $8.6 million, compared with $8.9 million in the third quarter of 2021. Net loss for the quarter was $3.8 million or a loss of $0.52 per basic share, compared with a loss of $5.1 million or a loss of $0.73 per basic share for the third quarter of last year, an improvement of $1.3 million in our profitability.

Adjusted EBITDA, which means adjusted earnings before interest, taxes, depreciation and amortization, for the third quarter of 2022 amounted to a loss of $516,000, compared with the adjusted EBITDA loss $2 million in the third quarter of 2021. improvement of $4.5 million in our adjusted EBITDA profitability. Our nine month results are impressive as well. OMNIQ reported revenue of $77.5 million for the nine months ended September 30, 2022, an increase of 45% from $53.4 million in the first nine months of 2021. The revenue increase reflects the consolidation of our financial statements with Dangot Computers, which we acquired in July of 2021, as well as organic growth. Total operating expenses for the nine months ended September 30, 2022 or $24.2 million, compared with $19.5 million in the same period of 2021.

spending from the consolidation with Dangot. The class for the nine months ended September 30, 2022 $9.6 million or a loss of $1.29 per basic share, compared with a loss of $10.8 million or a loss of $1.86 per basic share for the first nine months of last year. Adjusted EBITDA for the nine months ended September 30, 2022 amounted to a loss of $1.5 million, compared with an adjusted EBITDA loss of $3.6 million in the same period of 2021. Cash balance at September 30, 2022 was $3.8 million, compared with $7 million at December 31, 2021. I would like to note that the cash reported from $2.9 million at the end of the second quarter to $3.8 million that we have for September 30, 2022. Now back to Shai for further highlights on the strength of the business and the opportunities ahead.

Shai?

Shai Lustgarten: Thank you, Neev. To help you better understand the path of the company, I would like to remind you that 2020 was a year we focused on taking our AI Machine Vision Technology and making it the foundation of our next generation AI product. In 2021, we invested in making our company stronger to support our markets penetration plan. We focused more on our balance sheet performance and spend time successfully uplisting to the NASDAQ a significant milestone. This ensured our plan for execution for the next years ahead. In 2022, as we continued our focus on profitability, we started executing on the significant scalability our AI products bring. This is shown by the various achievements we discussed earlier in the call.

To you, I say, this is just the beginning. These achievements show the potential for what lies ahead. In addition to the obvious significance of the many wins they are equally important as reference points. These references are what potentially allow us to capture more of the market opportunities, which we expect to focus on during the course of the next year. With these achievements, we penetrated many new markets with our AI products. These products are all based on our single AI Machine Vision Technology platform. Our platform allows us to produce products that are relevant and answer the needs for many markets. OMNIQ’s Technology and products makes the invisible visible, creates automation by eliminating the touch of a human from any process, allowing countries, cities, schools, airports, hospitals, parking lots, and enterprises to be proactive and achieve unparalleled increased productivity, security, efficiency and stronger customer satisfaction.

OMNIQ’s team is indeed focused in concluding 2022 as a growth year and building the path to a successful 2023. It is important to note that technology and references that we have created so far is much more than looking a year ahead. We have a clear focus and strategic roadmap of continuing our penetration into the fastest growing markets, which we will continue to execute on and we look forward to reporting back to you in the next quarters ahead. Operator, I’ll now turn over the call for questions.

Q&A Session

Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. Thank you. Our first question is coming from Jaeson Schmidt – Lake Street. Please go ahead.

Jaeson Schmidt: Hi, guys. Thanks for taking my questions. Shai, I just want to follow-up on your prepared remarks, you mentioned that demand is stronger than anticipated. I just want to clarify, was that just in regards to Q Shield or across the whole company’s product portfolio?

Shai Lustgarten: Thank you for the question, Jaeson. On the prepared remarks, yes, it was related to Q Shield on the really strong demand that we see. But to answer your question or elaborating further, we do see this as well increase — the increased demand also in all of our other products and sectors we serve. So it’s the continued growth in backlog is still happening, and I would say it’s across the board.

Jaeson Schmidt: Okay. That’s really helpful. And then just following up on that, 12 cities under contract in the law enforcement space. Can you talk about, sort of, how that pipeline is growing where that pipeline sits at today?

Shai Lustgarten: Yes. We’ve — I think we spoke about it before that in the previous call, we had about 30 something cities in the pipeline. We’re seeing more than 60 cities today. Important to mention that we could have reported for Q3 even a larger amount of cities under contract, the only reason why this did not happen is because of elections and city council decided to wait, kind of, all of them to wait until that end, so they can sign the contracts right after the election. So we are expecting that continued growth in the cities to be under contract.

Jaeson Schmidt: Okay, great. And then just the last one from me and I’ll jump back in the queue. How should we think about gross margin going forward? Obviously, the continued contribution or growing contribution of AI portfolio shouldn’t lift that up, but I have to imagine supply chain and some of those dynamics inflation et cetera are creating some headwinds. So any color you can provide on how we should think about gross margin here in Q4?

Shai Lustgarten: Yes. Obviously, I mean, we started talking about it. We had several discussions about that in the previous calls as well. We explain how as designers, how as original equipment manufacturers, we can provide or seek for alternatives in case we have challenges in different components. We’re still doing that and we’re still able to provide the response required in order to continue showing growth quarter-over-quarter. And the gross margin trend is going to continue picking up, going to continue growing as we discussed before as well with the objectives that we stated as well. And it’s assured, I would say, or secured because of again the increased backlog and demand that we see in the AI product. So just to give you an illustration, in 2021, we had about $2 million at this time in backlog, while right now we have about a little bit over $5 million already in backlog still for this year.

Jaeson Schmidt: Okay. That’s really helpful. Thanks a lot guys.

Shai Lustgarten: Thank you. Appreciate it.

Operator: Thank you. Our next question is coming from Moran Pober with Acquisitions.com. Please go ahead.

Moran Pober: Hey, Shai. Thank you for answering my question. So first question is what are the AI sales in 2022, compared to 2021?

Shai Lustgarten: AI sales in 2022 year-to-date or better say in Q3 is more than — is about $4 million actually, compared to half of it in 2021, so basically 100% increase.

Moran Pober: Nice. And what’s the plan for next year? Like how do you see 2023?

Shai Lustgarten: We want to continue keeping our objective to double that next year. So if we saw doubling — we’ll see more than doubling ourselves this year, we’ll at least see — or our objective is at least to see that doubling next year.

Moran Pober: All right. Sounds good. Congrats. Looking forward to see that.

Shai Lustgarten: Thank you, sir. Appreciate it.

Moran Pober: Thank you.

Operator: Thank you. Our next question is coming from John Ragard with Spouting Rock. Please go ahead.

John Ragard: Yes. Thank you. I have a couple, first one is if, Shai, that you could give us a little bit of quantification on the — how supply chain impacted the business in both the revenue and the cost of sales in the third quarter? Did you miss some shipments, because you were short components? And were there additional costs incurred to get product to the facilities to complete things as well?

Shai Lustgarten: Yes. So yes, we have, if I need to quantify that, we’ve missed probably $2 million in shipments, due to different reasons in supply chain. It’s — I would say, a lack of products that some of the OEMs we work with partners, we work with — had to — our still facing challenges. On the component level of our systems, we usually are able to meet the objectives of the deliveries as we find alternatives being designers. But some of the solutions we sell still have part of the solution or products of other OEMs as well and as a total solution provider. When we meet certain products, then that could affect the delivering that happened and like I said to quantify that it would be about $2 million. So we could have basically sold $29 million, but still happy with the fact we’re able to show a record-breaking sales revenue of $27 million, that’s regarding the revenue.

Regarding the gross margins, I would say about expenses that relate to expedite deliveries, expenses that relate to of unique shipments that you need to — that you incur, because you want to make sure not only you meet the revenue objectives, but more importantly to serve your customers. That cost about, I would say, roughly close to $600,000 or $550,000 this quarter. So basically, you could — this is a good question, because basically if you look at the adjusted EBITDA, you’re already breaking even or a little bit already positive. But again, we’ll probably need to see that next year. How do I see this going forward? I can’t say, if we’re going to finish all these challenges, but I can say that the world is doing much better and we as a company are doing much better as well.

And I’m hoping that we’ll continue to be able to show the growth in all parameters.

John Ragard: Thanks. One more if I may, as it relates to Q Shield and the safe cities, what is a prudent pace at which you and your distributor can install new cities that are under contract and continue the high quality and reliability of what you’ve had. We’re just trying to model out the future and get a kind of get a pace of how many installed and revenue generating cities there will be as we go forward?

Shai Lustgarten: Our plan is to, of course, install in as many as possible just to give you an illustration. If you go — if we do installed, for example, in 100 cities, then we talked about over and I’d like to be conservative here, but over $20 million of revenue, return revenue a year for that, I mean, as a thumb rule. But again, I’m trying to be conservative. And we — like we mentioned, we started this initiative nine months ago only. And by now, we have $12 million there are probably double that amount that we’re ready to sign the contracts. But like I mentioned again, in the previous question asked by Jaeson, due to elections, this kind of postponed that, but still we’re looking forward to get this contract signed this year.

So that would — if you look at it as a product that just penetrated this market nine months ago. If we conclude this year, with about 20 cities signed, then the path towards 100 is real quick given all the precautions and cautious in that statement, but still we are happy with the pace. We’re happy with the deployment. We’re happy with the interest. And most importantly, we’re happy with the performance of Q Shield, because it’s doing more than we ever expected, quicker than we ever expected. So I hope that kind of gives you more color and answers your question.

John Ragard: No, it’s a big help. Thank you so much for updating us on safe cities.

Shai Lustgarten: Thank you. Appreciate your support.

Operator: Next question. I do apologize, sir. We have a question from (ph) with Family Office. Please go ahead.

Unidentified Analyst: Hey, Shai. Congratulations on the top line growth and progress on the bottom line.

Shai Lustgarten: Thank you.

Unidentified Analyst: So I wanted to go back real quick, this wasn’t one of my primary questions, but I just wanted to go back and make sure I understood that you had about $600,000 of expedited shipping in Q3, expedited shipping cost. So basically, you would have been cash flow breakeven or cash flow positive on an EBITDA basis is that was normalized? Did I hear that right?

Shai Lustgarten: Yes.

Unidentified Analyst: And are you incurring expedited shipping cost in Q4?

Shai Lustgarten: Less than what we saw in Q3.

Unidentified Analyst: Okay. All right. So I wanted to ask a couple of questions around the October 17 news release, where you were named the total solution partner for the large global long-term here Enterprise Asset Intelligence Company, I don’t really understand what we’re doing there, so a couple of questions. Can you basically tell me what the combined solutions are that we’re taking out to industry? And what is it that we bring to the table? And what is it that this partner of ours brings to the table to make that solution work?

Shai Lustgarten: Yes, of course. So as you know, OMNIQ is a total solution provider to Fortune 500 enterprises. I mean that these are some of our customers. Being a total solution provider gives you the responsibility to deploy different technologies to respond to the needs of these customers. Basically, that is what we always call — we refer to as automation of processes. And part of automating processes in supply chain for such huge organizations, a part of it today is robotics and we all heard about that. The largest — I would say, robotic company in the world and also supply chain company in the world that we refer to in this PR that we partnered with selected us to be one of their few partners that they share their robotic solutions with.

Why? Because again, we are the face to the customer, we are the ones that respond to the largest customers in the world’s needs. And what we bring to the table, again, is a total solution, but so not only, of course, the integration of that total automation to their supply chain levels, but also we’re bringing to the table our unique Machine Vision Technology together with robotics, you can really aim for 100% efficiencies and that is what makes this press release unique not only, because we were selected due to the fact we have unique technology that attracts our customers to deploy, but also — and they want to be part of it, but also now that we have the total solution that can respond to additional needs with robotics.

Unidentified Analyst: Okay. And if they’re a global leader in this space, I assume they have a large sales team, do we benefit from their feet on the ground when it comes to taking these offerings that we’re a big piece off into the marketplace? Are we basically benefiting from having their people involved with selling these solutions?

Shai Lustgarten: Absolutely. And in that always takes effect opportunities that were handed by their sales team. Now being partners, we’re getting daily leads and opportunities that are more relevant to our technology and that come to them, because like you mentioned, they have huge sales team, they have huge reseller channel that they depend on and being exposed to their ecosystem being partners. Now we are getting also leads opportunities which already generate revenue.

Unidentified Analyst: Okay. One final quick one on this topic, Shai, so when you look out over the next 12 to 18-months, I mean is the potential to expand the revenue that we’re generating with this partner? Is it — can you quantify that a little bit? I mean, what could this be 12 to 18-months from now compared to what it is today in terms of revenue?

Shai Lustgarten: I don’t know if I can really quantify. I mean, I can say that if we’re seeing in supply chain not considering our Machine Vision breakthroughs that go into supply chain. If we eliminate that for example, we’re seeing growth in supply chain of single-digits in percentages. This capability now that we have and the partnership we created together now with our technology that should bring it to higher — much higher double-digit, so minimum 20% — so we should at least double the growth that we’re witnessing on year-to-year basis from regular operation and regular products we offer today, which should probably double in percentages, the growth in that supply chain segment.

Unidentified Analyst: Okay. And Shai, one final question. The retail space sounds like one of your biggest opportunities you mentioned that you’re targeting other companies in the automotive space. If we if we, kind of, box off automotive and restaurants, could you share what a couple of other verticals in the retail space are that you’re targeting?

Shai Lustgarten: Yes, of course. As we spoke, as we mentioned during the call, we became relevant to many markets using one platform, one AI platform that we spend a lot of time in designing and we have nine patents on, et cetera. And that made us relevant to different markets. We already created the penetration. One of them is what you mentioned, the retail space with automotive. But when you look at different retailers that we are now exposed to is all the car dealerships, all the drive-throughs that go into car washing different additional airports in different additional ones, not only major ones that were exposed to today, we got more than 50. It makes everything more — anything that had today, the low hanging fruit, anything that has drive-through either in retail or in restaurant.

We have in a box solution that is becoming a plug-and-play one that we are relevant to and that’s what makes it’s so unique. That’s what makes us so excited, because now we’re relevant and it’s crossing or eliminating all the borders between markets it’s eliminating our limitations. We’re not looking just on markets. We’re looking now on the platform that is relevant to many markets. So as we train the engine, the algorithms to identify any type of vehicle that opens it up with additional components that we design, but opening it up for a drive-through, for example, product in a box product that we’re providing to this retailer and the restaurant, fast food restaurant, but now taking it to the other ones in different markets like I mentioned, give you some examples.

That’s the scalability that we’re talking about and that’s what really makes us excited.

Unidentified Analyst: Okay. Well, again, thank you and I look forward to hearing from you again in three or four months.

Shai Lustgarten: Thank you sir. Appreciate your support.

Operator: Thank you. There appear to be no further questions in queue. So I’ll hand it back to Mr. Lustgarten for any closing comments he would like to make.

Shai Lustgarten: Thank you, operator. And I’d like to conclude, first of all, I really would like to extend my sincere thanks to our loyal customers and suppliers, our professional team and other strong supporters. Last but not least, we would like to thank our shareholders for sharing the success with us, as well as wish you all continued success. I’m really looking forward to talking to you next quarter. Thank you very much.

Neev Nissenson: Thank you.

Operator: Thank you, ladies and gentlemen, and this does conclude today’s call. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.