OTIV announced 2Q15 revenue and EPS of $5.4m/($0.05) vs
our estimate of $5.5m/($0.04), respectively. Gross margin was
49.8% compared to our estimate of 48.6% and adjusted EBITDA
totaled ($0.7) million vs. our expectation of ($1.1) million. Cash
and equivalents was $14.4 million at 2Q15 with about $7 million
in debt. We calculate a cash burn of around $2.5 million in the
first half of the year and expect that to trend lower going forward.
On August 3, OTIV announced the appointment of Shlomi
Cohen as the company’s new CEO. We spoke with Mr. Cohen
at length this morning and come away from the call impressed
and optimistic about the future of OTIV. The following data
points are our key takeaways from the conversation:
The opportunity for significant growth of the reader business is
real and not just in the United States. Mr. Cohen believes the
opportunity globally is as big as the U.S. if not bigger.
Accordingly, the company may seek to bolster its global sales
and marketing effort to address this growing opportunity. We
believe this may require an investment by OTIV which could be
covered by the monetization of one or more business units.
With regard to the strategic review, despite being told repeatedly
that the remaining businesses are core in nature, we continue to
believe that all options remain on the table and that the sale of
certain business units is possible. In addition, parts of the patent
portfolio could be monetized - there are patents the company will
need to maintain to support the core business, but not all of
them.
With regard to the patent infringement case against T-Mobile,
Cohen was conservative with his thoughts. The damages
portion of the trial is scheduled for November and we believe
there is an even likelihood of a settlement or it going to trial.
There is a wide range of possible outcomes and we believe zero
is not likely one of them.
Bottom line – Bringing in an outsider to become the new CEO
should allow for difficult decisions to be made more easily. The
2Q15 results were fine - certainly not as bad as the recent share
price would suggest. We believe there is a lot to be optimistic
about from here and expect the company to lay out a positive
outlook for coming quarters on Monday’s call. We rate OTIV
shares a BUY. Our $2.50 target is based on $1.52 in value from
a 2x multiple of our 2016 revenue estimate and approximately
$1.00 from the patent portfolio and net cash. The model and
estimates in the tables of this note reflect our estimates prior to
the earnings release. We will update our numbers following
Monday’s conference call.
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