On Track Innovations is set to report 4Q15 earnings on March
23, with a conference call at 10:30 AM Eastern. We published a
preview on February 4 where we took a much more conservative
view on 4Q15 results and our 2016 outlook. Our view on 4Q15
remains. However, OTIV has announced several developments
over the past two months which lead us to believe 2016 may
turn out to be a year of material revenue growth that leads to
cash flow break even, reducing concerns around liquidity.
Highlights of recent press releases are summarized on the
following pages.
Specifically, our 4Q15 revenue/EPS estimates remain at
$3.8m/($0.05), respectively. We believe this quarter will be
similar to the weak 3Q15 results due to minimal orders from a
large customer. We forecast an adjusted EBITDA loss of $0.8m
and believe the company is likely to burn approximately $2m in
cash. At the end of 3Q15, OTIV had approximately $11.5m of
cash and equivalents and $5.4m of debt.
Looking forward to 2016, we are increasing our revenue
estimate to $21.1m from $19.3m. We forecast a similar gross
margin at approximately 50% but assume the $1 million
incremental gross profit is invested in growing the business,
resulting in our EPS estimate remaining the same at $(0.11).
Our optimistic view on 2016 would likely carry into 2017, but we
are not changing any of our 2017 estimates until we get better
visibility. Our 2017 revenue/EPS estimates remain at
$26.5m/$(0.03), respectively.
The main driver to our 2016 estimate increase is the press
release issued by OTIV this morning stating that it had sold
25,000 readers in the first quarter. Our estimate was closer to
10,000. Updating our model results in a new 1Q16 revenue
estimate of $4.8m up from our previous estimate of $3.8m.
In our opinion, the biggest risk to the story is liquidity. We
believe OTIV will burn approximately $4-5m in cash between
4Q15 and 2Q16, but believe recent developments suggest the
company can get to cash flow breakeven in the second half of
2016. While the margin for error is slim, it appears the liquidity
risk has been diminished.
We are maintaining our BUY rating and $1.25 price target which
is based on a 2x multiple of our 2017 revenue estimate of
$26.5m. Our target does not assign value to the significant NOL
asset, the patent portfolio, earn-outs, or other potential non-core
asset monetizations. Should OTIV be able to convert
partnerships and initiatives to orders and revenues, we believe
shares could be revalued higher.