SuperCom Ltd. (SPCB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the SuperCom Quarter 1 2021 Financial Results and Corporate Update Conference Call. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately 1 hour after the end of the call through August 27, 2021. I would now like to turn the call over to Scott Gordon, President of Core IR, the company's Investor Relations firm. Please go ahead, sir.

Thank you, Daryl. Good morning, and thank you for participating in today's conference call. Joining me from SuperCom's leadership team is Ordan Trabelsi, Chief Executive Officer. During this call, management will be making forward-looking statements, including statements that address SuperCom's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in SuperCom's most recently filed periodic reports on Form 20-F, Form 6-K and SuperCom's press release that accompanies this call, particularly the cautionary statements in it. Today's conference call includes EBITDA and non-GAAP financial measure that SuperCom believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in SuperCom's earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, May 27, 2021. Except as required by law, SuperCom disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It's now my pleasure to turn the call over to Ordan Trabelsi. Ordan, please go ahead.

Thank you, Scott. As you guys are aware, we had an earnings call just less than a month ago for our 2020 results. So I will keep this short and sweet. When I started my new role as a CEO in February, I stated high level objectives and investing more in our sales and marketing to drive future revenue growth and leveraging the increased scales to improve profitability over time. I also stated, we plan to improve our financial processes to improve the quality and timelines of our financial reporting. And to begin reporting our financial performance on a quarterly basis, I am pleased to announce that for the first quarter of 2021, it's the first time we have reported quality results since the first half of 2019. There's a lot of effort invested by our team to get here, and we'll work hard to make contingent improvements to our financial reporting processes. Our investments in sales and marketing will be focused primarily on our IoT segment, which we believe has a significant opportunity ahead. Since the COVID pandemic began, we have seen several trends that we believe will drive future demand for our IoT tracking technology. First, as COVID began at the initial spread, correctional institutions, many of which are already overcrowded, begin to see a spike in infections, creating a risky environment for both inmates and workers. As a result, we saw in various geographies around the world, a dramatic increase in demand for electronic commodity and solutions that would be implemented to reduce the burden at correctional facilities, helping deliver crowding problems and minimizing COVID infection. An article published last time by Bloomberg cited that this number of prisoners wearing monitoring [ budget ] increased 25% to 30% since the start of the pandemic. We believe the trends of increasing home confinement are not just temporary trends driven by the pandemic, but the beginning of a secular shift that will increase the use of home confinement as one of the ways to punish offenders. We think there will be a change in policy as governments realize the benefits of these solution. Not only are they effective in controlling and helping with the entry of offenders, but they are also cost-effective and significantly reduces the financial burden managing with the incarcerated population. As a result of these trends, we have seen increased activity in various governments looking to implement these solutions. In September of last year, we signed a contract in the Caribbean for our PureSecurity electronic monitoring solution. In November, we signed an electronic monitoring contract in the state of Wisconsin. In December, we signed a contract with government of Latvia. In the state of Alabama, California, and other state and the southern United States. And earlier this month, we won a new project in California valued at up to $4 million. And we believe that, that could be [indiscernible] just to be giving a big wave of governments looking for effective costs efficiently to adjust overcrowding, high cost of incarceration and the cycle of recidivism, where essentially why prisoners are incarcerated, completions come out of prison and are likely to [ kind of climb again ] where we're back in. And this process helps to break that cycle. In addition to these home confinement solutions, the same technology enables us to offer effective quarantine solutions, which is our PureCare offering. This product enables government to manage the spread of COVID-19 through self-quarantine by enabling government authorities to monitor movement of people that have been exposed to the virus, who travel from other region. The solution is able to track people's location within buildings, vehicles and outside, and to verify if the person had maintained their home quarantine requirements. Essentially, we'll say, it's a matter of 10, 14-day quarantine or not without reaching into their private information. Since our launch, we have received significant interest, initially won an award with the Israeli government for a project with up to $3 million per month once it goes live in Ben Gurion airport, with initial term of 3 months. Our win rate with bidding on competitive electronic monitoring projects in Europe has been over 64%, a testament of our superior technology and our highly regarded reputation in the industry. We'll continue to invest in our technology to continue to offer the best solution technologically on the market. It is important to note that the revenue generated from these contracts are primarily recurring in nature as they are priced on per person per day usage, primarily during the term of the contract. This contract structure provides SuperCom revenue stream that is generally stable during the contract period. And in 2020, we shared a 82% of our revenues were steady-state recurring revenues, as we call them, from projects past the deployment stage with repeat revenue. These trends provide a significant opportunity for our IoT tracking solution segment. And as I mentioned earlier, we will be investing more in our sales and marketing efforts to take advantage of it. Looking into our financials for the first quarter of 2021. Earlier today, we released financial reporting of our P&L and balance sheet updates for the first quarter of 2021. Because this is the first period of reporting results on a quarterly basis in a while, we don't have a reported comparable year-over-year period to measure it to. Our revenue in the first quarter was approximately $3 million, which primarily represented our IoT tracking segment, which has been our focus. Our gross profit in the first quarter was $1.7 million, which represents gross margins of 55%. Operating expenses were $1.8 million, resulting in operating loss of approximately $182,000. But given numerous acquisitions in past years, our amortization expenses were significant in non-cash. Our EBITDA for the quarter was approximately $650,000 positive. We secured additional subordinated debt this quarter, and our cash and restricted cash balance increased to $9 million at the end of Q1 2021, up from $4 million at the end of 2020. We also used some of the cash to pay down some of our accrued expenses and other liabilities. As part of continued efforts to turn their balance sheet, we converted some subordinated debt to ordinary shares as well. This helped reduce our net debt at the end of Q1 2021 in comparison to the end of 2020. We also invested in more inventory to support faster deployment of new projects. And our working capital increased to $12.7 million at the end of Q1 2021 from $5.3 million at the end of 2020. And with that, I'll turn the call over to the operator to begin questions and answers.

[Operator Instructions] Our first question has come from the line of [ Ramod Dienedia ] with Aegis Capital.

Ordan, you've bring some good points about the COVID pandemic and how that -- there's a significant impetus here for our business. I wonder with all the travel restrictions and as you pursue international contracts, is that -- the travel restrictions caused any sort of delays in terms of countries or municipalities or states looking at potential contracts? And if so, now that travel is starting to pick back up again, at least in certain regions of the world, if that is a potential catalyst for additional contract signings?

A great question. We saw a lot of different, let's say, forces work throughout the pandemic. Firstly, when the pandemic started, we saw a lot of nations looking to [ release ] from prison. They wanted our existing provider of electronic monitoring solutions, and after then they could generate 1000s more of units and quickly put them on. It was very hard. It kind of takes time to manufacture these units for us and any of our competitors. So that created an initial spike, but it did slow down the general RFP activity because of government focus, travel and other restrictions. So we did see a slowdown last year. This year, we're seeing an increase in RFP activity. We've been submitting more RFP -- more proposal to RFPs. We won an RFP in Israel for PureCare. We won RFP in California for a project of the $4 million. And also on the negative side, there's various decreases in active talent in regions in the U.S. Last year in California, for example, a lot of course were closed. So we had a harder time getting more active clients because they weren't sending us potential enrollees to the program of house arrest. So it's a mix diablo. We did see all together, which is very interesting. There's been a lot more exposure to home confinement, to tracking of people's location, to understanding the value in house arrest and GPS monitoring. And a lot of governments are becoming more comfortable with the contract. So while we already saw a trend of growth because people that have tried it -- our government officials that have tried this over the years have saw how effective and positive it is, together with the fact that technology has become better in the field of location tracking. And also just general policy shift to get people move out of prisons, and to help with reentry. Not just with tracking, but also with employment services, with anger management and other acquired techniques that -- only when they come out of the incarceration. So the general shift has already been there and this gave a sort of a spike, booster forward. And we're actually looking at the electronic monitoring market together with the quarantine compliance market. And even though there's a vaccine in many places are now available in the world, there's still an important focus for governments to prevent variants and mutations of the virus entering their areas. Even in Israel, for example, there's restrictions right now in 9 or 10 countries around the world. If you come back for example, from India, the Ukraine, currently with Israel, I believe, even if you're vaccinated, you still are required to be quarantined, given the rest of variants of the coronavirus.

Okay. So is it fair to say that over these next few months and quarters, you think the pace of RFPs may accelerate somewhat? And obviously, you guys have a -- I think you noted a 65% win rate, obviously very impressive. So -- but is it fair to say that you think that, that RFP pace on a global basis might be picking up?

This year, we certainly saw an uptick in RFP activity and the positive that would put out compared to 2020. So we are seeing things pick up for various reasons. And that give us more opportunities to win them. The industry is -- roughly, 10 players who can provide technology. They're very varied industry. Google or Apple can just come in one day and start bidding on these, as their company has to show 5 to 10 years of experience doing exactly this, tracking on [indiscernible] technology effectively, understanding all the complexities and challenges when they're deploying these kind of programs. And only then, it can be bid. And we allowed -- in the projects we bid, won over 64%, 65% in past years, which is great considering the amount of players are competing again. So as the amount of RFPs that come out increases, we think that gives us more and more opportunities to win. And the -- a lot of it is just referrals from one country or one region to another. The more their people try our technology, they like the results, they tell their colleagues and other government in similar roles, and then they come to us for various RFP or other procurement opportunities. Sometimes an RFP is not required in various states.

Our next question has come from the line of [ Z Ryan ] with Jabre Capital Partners.

I'm not sure you'd be able to give us the answer here, but any update on when the contract with Israel will proceed? In the media, it seemed like it was going to happen in the first couple of weeks in May until the flare up occurred. Is there any update subsequent to the ceasefire?

So currently, we're still in a similar state on the project. We worked on the initial integration and some other elements required for the project. As we announced, we had a successful pilot. And then when it came into large-scale projects, the more integrations were required at various departments of the Israeli government. We're waiting for an official go-live for it to go in the Ben Gurion airports. And various political and geopolitical situations in Israel have held us up a little bit. We're still waiting for the update, and we are ready with the units and the technology integration to go live at that time.

Our next question has come from the line of Spencer Kirschman with H.C. Wainwright.

Just wanted to see if you had the share count at the end of the quarter?

I know that currently we typically had our filings 6 months in a year. As a foreign issuer, we have all equity statements in the exact count. We started getting the quarterly now, and we want to get the P&L and the balance sheet. But in future funds, we'll have the exact shares.

Okay. Okay. And with the PureHealth projects, are there any upfront costs? Any kind of volume that used to be guaranteed?

Can you refine the question [ all that ], what do you mean up upfront costs and volume?

More so, a cost to implement the technology, things of that nature?

We're looking -- the underlying technology is one that we've been developing for many years for tracking our offenders. This is a very significant use case. We're not actually tracking the location everywhere. We're just verifying that they've been on home or not. So as long as they have the brace sit on their arm, around their hand here, and they've been at home for the 10, 14 days, we give a signal that they complied with the program. We don't track any of the information. Everything that's deleted afterwards, a lot around sensitivity to privacy, these are not incarcerated individuals. And we have increased our production capabilities, to be able to produce up to 1,000 units per day, probably the fast in the industry by far. But our unique architectural resolution and the fact that we can manufacture a lot of it in Israel had helped us reach this level and this capability. We've manufactured, and the government has given us estimates for what they believe the amount of units will be. We manufacture accordingly, not the full amount, but just the head start. And we have the capacity to continue manufacturing very quickly once this goes live. So we have the initial quantities for the start, and then we will create more as they start to flow.

Okay. Yes, that's helpful. And are you able to give any guidance on future projects, a kind of like an outlook on gross margin as well?

What? Any guidance on the future project gross margin? Is that what you're saying?

On future projects just throughout 2021?

Are you asking about the [indiscernible]?

Like anything in the pipeline?

So the way these things work, as you can imagine, it's kind of binary. We have a lot of RFPs that we bid on, and there's only one winner for each RFP typically. So we don't know what's going to come through. We're optimistic. In the last few years, we run around 10 new projects every year. This year, we started announcing some wins, and we expect to announce more wins of various sizes. And what's interesting is every time you have a win, that's another reference. And initially, we couldn't bid on a lot of these projects because we didn't have the references required they want, this around many units for this many years. And now, especially with projects like the PureCare projects, in Israel, we have ability to deploy many units, and use it as a reference and then win more and more projects. And this is -- and this is interesting. We have won a lot of our projects based on our technology capabilities. We didn't have a very big sales and marketing team, mainly it's bidding in [indiscernible] and RFPs with our technology that scores typically very high. Now we plan to invest more also in sales and marketing. And we believe that together, that technology will allow us to continuously get our larger market position in the field, which is already a growing market. So we think there is some good potential there, and we can get a stronger position.

Yes. One color on how you plan on expanding sales and marketing?

In a very simple matter, actually, we had a very small amount of people working on sales and marketing because we couldn't support all the deployment, demand from customers, even when the RFPs that were out there. It was hard for us to produce at that speed. And our cash balances were low. We couldn't invest in that fashion. Now we've secured financing through various channels. And as we've described, we have a strong balance sheet. And this projects, for example, in Israel, we would have never been able to do a year or 2 ago, just the amount of cash required to manufacture all these units will not be possible. Now we can do that. And we have capacity for bringing on more sales and sales support personnel to bring on more projects, which will bring on more use of cash in the short term because the projects paid cash for 6 to 12 months, but then generate very strong positive cash flow for the next years to come. Project is usually 5 years or so. Until after 6 to 12 months, you're switched over to positive cash flow generation.

Thank you. There are no further questions in the queue. I would like to turn the call back over to Ordan Trabelsi for any closing comments.

Thanks, everyone, for joining our Q1 2021 call. We look forward for sharing additional update and having a quarterly calls in the quarters to come. Thank again.

Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a great day.