SuperCom Ltd. (SPCB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the SuperCom 2021 Annual Financial Results and Corporate Update Conference Call. [Operator Instructions] Participants of this call are advised that the audio of this call is being broadcast live over the Internet and is also being recorded for playback purposes. Joining me from SuperCom's leadership team is Ordan Trabelsi, SuperCom's President and Chief Executive Officer. During this call, SuperCom management may be making forward-looking statements, including statements that address SuperCom's expectations for future performance or operational results. These statements are only predictions and SuperCom cannot guarantee that they will, in fact, occur. 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 and Form 6-K and SuperCom's press release that accompanies this call, particularly the cautionary statements in it. Today's conference call includes EBITDA, a 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, a comparable GAAP financial measure, please see the reconciliation table located on SuperCom's earnings press release. Reconciliations for other non-GAAP financial measures to comparable GAAP financial measures are available in there as well. The content of this call contains time-sensitive information that is accurate only as of today, March 31, 2022. 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 is now my pleasure to turn the call over to SuperCom's President and CEO, Ordan Trabelsi.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Earlier, we issued in a press release our financial results for the fourth quarter and full year 2021, a copy of which will be available on the Investor Relations section of our website. We are proud of our achievements over the past year, and since I entered the new role as President and CEO in February 2021. For the first time in 5 years, instead of double-digit percent decline in annual revenues, we achieved growth in annual revenues. We also generated over $2 million in EBITDA, enhanced our operational infrastructure, strengthened our workforce towards future growth and maintained technology leadership. We also raised the needed financial resources to support the implementation of our business plan with new longer-term financings with preferable company terms. We settled all disputes, cleaned up old payables and reorganized legacy parts of our company for improved efficiency. We owned our business plan and aligned our customers, partners and employees with our mission and goals. And in a global environment, riddled with the uncertainty of a global pandemic and geopolitical crisis, we are humble to say we feel confident about our future. Throughout SuperCom's 33-year history since its founding in 1988, it has always been a trusted partner providing cutting-edge electronic and digital security solutions to the dozens of governments worldwide. In recent years, we have become more and more aware of the immense challenges that nations around the world are facing in dealing with their offender population. And now we will leverage our technology, expertise and government security and excellent team towards our current focus on the public safety sector. As part of our mission, we strive to revolutionize the public safety sector worldwide to provide electronic monitoring technology, data intelligence and complementary services. Many governments around the world are facing severe challenges in dealing with their offender populations. Firstly, many countries are suffering from high recidivism rates, for example, in the U.S. within a few years of the release, 3 out of 4 former prisoners are rearrested. Recidivism clogs the criminal justice system. Without employment opportunities and bare necessities such as housing, food and clothing, behavior management and substance abuse control, successful reentry into society seems nearly impossible for former prisoners. Lowering the recidivism rates, the rates at which someone reoffends, benefits society by reducing the rate of crime and present population, saving taxpayer dollars and most pertinently ensuring that prisons serve their purpose of reform and improvement. Secondly, prison overcrowding is one of the key contributor factors to poor prison conditions worldwide. Prisons in over 118 countries exceed their maximum capacity occupancy rate with 11 national prison systems with more than double their capacity. It is also arguably the most significant single problem prison systems are facing, and in consequence, can at worse, be life threatening and, at best, prevent prisons from reformative function. Overcrowding can be so severe that prisoners even shift on top of each other or share beds. Thirdly, in 2020, about $80 billion were spent on operating prisons in the U.S. alone to keep roughly 2.3 million people behind bars. Meaning that 0.7% of the entire U.S. population is incarcerated at any given moment. Nearly 1% of the U.S. population is in prison behind bars. The societal cost of incarceration, lost earnings, adverse health effects and the damage to the families of incarcerated are estimated at up to 3x the direct costs. Unfortunately, these issues aren't unique to the U.S. and are prevalent globally. It is clear that prisons are far from ideal for solving to discuss challenges. SuperCom, we provide top-notch solutions to solve these challenges effectively within our technology and complementary services. Our pure security solution provides an effective way for institutions to manage their populations of offenders while significantly reducing the associated cost of having an inmate. We provide house arrest solutions with ample monitors and complementary technologies. The cost savings associated with our solutions are substantial. Total cost of monitoring offender and home confining or GPS electronic monitoring, both technology and services and manpower is approximately $10 to $35 a day, substantially lower than $100 to $140 daily cost for each inmate in the correctional facilities. Most importantly, home confinement has been shown to reduce recidivism, highlighting its effectiveness in helping offenders improve their lives. In addition, our PureSecurity Electronic Monitoring Suite of products provides an efficient and effective way to enforce home confinement while easing overcrowded prisons. We see institutions increasingly evaluating home confinement alternatives to address these issues. As a global trend that we see of governments turning to innovative solutions other than incarceration to ensure public safety. Offenders' electronic monitoring is becoming more and more in demand and it solves most of the mentioned challenges. The electronic monitoring market was valued at about $1.1 billion in 2020 and estimated to reach $1.6 billion by 2025. The U.S. and Europe constitute about 95% of these markets today. With a strong presence, reputation in both markets, SuperCom is well positioned for continued growth and capitalizing on new opportunities. In Europe, we have recently seen an uplift in RFP bid activity with a whopping over $200 million in expected upcoming project bid opportunities in the next 18 months. In parallel, we continue to score well on competitive tenders. For example, last week, we announced a win through a competitive RFP and were awarded Croatia's first national electronic monitoring project, further increasing our hold in the European market. This win comes after a consistent streak of wins in the European market, displacing incumbent vendors time after time and boasting over a 65% win rate in competitive RFPs in Europe. We won the $7 million national electronic monitoring project with the Ministry of Justice in Sweden, a $1 million project in the field of domestic violence with the Swedish police. And national electronic monitoring projects in Denmark, Estonia, Finland, Bulgaria and Latvia, just to name a few, in Europe. We recently announced a few projects wins and expansion into 3 more U.S. states, Texas, Idaho and Wyoming for the PureTrack GPS tracking platform, serving adults and juveniles. In addition, we announced that our fully owned subsidiary, Leaders in Community Alternatives, or LCA, launched a new project with probation department in Central Coast, California, to provide rehabilitative services. The project is valued at approximately $1 million over 3 years or roughly $340,000 per year, and has already been launched. Our recent announcement of new contracts in Europe and U.S. are exciting examples of the successful execution of our business plan with a vertical in which we have a strong presence and an excellent reputation. Our success in winning these projects is a function of a few main factors. We attribute our wins mainly to the proprietary technology which we developed in-house here, in Israel, which scores very highly in the competitive RFPs. And over time, through our strong reputation and recognition as a premium provider of electronic monitoring technology and services. Our electronic monitoring technology supports various programs such as house arrests, GPS monitoring, rehabilitation services and more, and has won over 40 new multiyear government projects since 2018. Also, over the past years, our general strategic focus has been to move away from our legacy business with onetime product revenues in Africa and South America, and focus more on recurring revenues in developed countries with our IoT Tracking business. In 2021, we saw a gradual global recovery from the pandemic with more and more RFPs and procurement activity from our potential government customers. In addition, we acquired an electronic monitoring criminal justice business in 2016 in LCA. It's headquartered in Oakland, in California. And we acquired it in 2016 with a strong presence it has in state since 1991. The large reference base relationships and experience we inherited through this acquisition and integration has allowed us to enter the region with new technologies and capabilities, unleash valuable synergies and generate continuous stream of new multiyear recurring revenue projects with an establishment in California. We are well positioned for growth into more locations and larger projects. We already won over $25 million worth of projects in California since its acquisition so far. We're setting the company's global sales division, including a new VP of Sales and sales managers with the industry experience and a shift from passive bidding to an active outreach sales strategy. The implication of this move is already starting to reflect in our revenue as it increased for the first time since 2017 annual growth year-over-year. Although the sales cycles in our business are long and it will take years to see the full effect of this change and the duration of the relationships with the customers can last for years. The investments we have made thus far have been driving increased activity of existing customers and numerous new demos and evaluations with potential new customers. We operate in a small niche market where our customers know each other. And having a solid reputation is an essential factor in the business when selecting a vendor. The new wins, combined with our improved sales team, are the first steps in executing the company's U.S. market expansion strategy. We also consider a potential treat of strategic acquisition of resellers in 2 locations as part of our growth plan. Our strategy that has been to build a major technology, expand our presence and deliver outstanding services. Each customer won and project deployed further strengthens our reputation, making us even more competitive. And in the past year, we have further progressed on each of these elements and have achieved recognition for such by awards of existing customers and new ones in existing regions and new regions. Our strategy has always been to lead with technology, and this year, we continue invest in research and development to ensure our products remain the most competitive in the market. Our reputation in industry regarding our IoT solutions continues to be stellar as a result of these investments and is evidence that these efforts are paying off. With these product investments, we continue to introduce new features and new technologies into our proprietary platform, extending our lead in the marketplace. Our R&D teams continue to innovate and to check whether it's new features and biometric capabilities, battery life, communication capabilities, our entirely new solutions for domestic violence, alcohol monitoring and smartphone electronic monitoring within dense hard-to-monitor urban areas and subways. Our R&D teams continue to innovate and disrupt the status quo. We believe there is an opportunity to further enhance our growth through strategic acquisitions and our local service providers with strong reputation in customer base in the local communities. Many of whom we know well through prior dealings. An example of this strategy is reflected through our $3 million acquisition of LCA in 2016 and the main strategic value to new project with new service providers. At this time, let's move over to the financial discussion. As mentioned in the previous earnings call, and apparent now, the company has invested in its financial reporting resources and returned to quarterly and timely reporting last year. We are happy to have our annual earnings call in March for the first time in 10 years. We have acted to strengthen our balance sheet. Throughout 2021, the company secured, through the issuance of multiple notes, an aggregate proceeds of $12 million of government debt. In March 2022, the company raised $4.65 million in a registered direct offering with a certain single accredited institutional investor, providing us additional liquidity to execute our business plan. In addition, our financials include PPP and ERTC, which are given as incentives within the Coronavirus Aid, Relief, and Economic Security Act, intended to encourage employers to keep their workforce employed during COVID-19 crisis. Our revenue increased 4% for the full year of 2021 for the first time since 2017. As we said, we had annual revenue growth. This increase represents our continued shift from the legacy identification business to public safety business. And for the first time, our IoT division grew faster than the decrease in the legacy business, thus providing total annual revenue growth. EBITDA in 2021 decreased to $2.1 million compared to $2.8 million in 2020. We had a maintenance contract with one of our African clients come to completion at the end of Q2 2021, which accounted for around $300,000 in revenues per quarter, negatively impacting revenue growth in the third quarter. But still altogether, we had growth of 4%, offset by new projects in Europe and the U.S. In 2021, we focused on cost improvement to adjust the uncertainty related to the pandemic. Our gross margins improved 51% in 2021, up from 47% the prior year, primarily driven by improvements made to our services segment. Gross margins were also negatively impacted by the rolling off of maintenance contract in Africa. Fee and maintenance-related revenues, this was a high-margin business which replaced with many other project's lower margins, at least in the earlier stages, including a lot of target deployment costs. We increased our research and development spending by $400,000 from 20% to 23% of revenue. Our sales and marketing expenses declined by $20,000 in 2021 and general and administrative expenses increased by $80,000. Our cash or free cash balance at the end of 2020 was $4.6 million. In addition, the company had onetime the company had one-time expenses of roughly $4.4 million driven mainly by reorganization expenses retained into legacy business and allowance of doubtful debt of $3 million. The company had an operating loss of $6.7 million versus an operating loss of $3.7 million in 2020, again, mainly because of these onetime expenses. And as we see economies begin to open back up, we will continue to invest our sales and marketing to drive revenue growth. And with that, I'll turn the call over to operator to open the call for questions. Operator?

[Operator Instructions] Your first question is coming from Michael Somerstein.

Can you just tell us a little bit more about the contract that you closed in Croatia?

Yes. Thanks for the question. Very excited. As we mentioned before, we had a long stream of new national contracts in Europe, including Sweden and Denmark, Czech Republic, Bulgaria and Latvia. Some of these countries are just starting out with EM such as in Croatia. This is their first full-scale nationwide EM contract. And we competed against a few other vendors who have a presence in Europe, and we scored the highest and won the project. We received the award last week and we announced it. And we will provide follow-on announcements on the project launch and final contract timing when they occur.

[Operator Instructions] Your next question is coming from Z Ryan from Sabre Capital.

Just a real quick question on the Finland contract. I don't think we've seen that go live yet. Is that correct? And if not, what's been the delay there? And would we expect similar delays as it relates to Croatia?

Yes, good question. We don't expect similar delays with Croatia. Sometimes when we have awards, there's an appeal process. Our competitors have the right to appeal and that sometimes delays the process a little bit such as you've seen in Finland. But we feel confident both in Finland and in Croatia that we will continue to project launch. And we will provide updates accordingly as such, just as we have with Sweden and other projects that we announced. First we announced the award and then we announced the official project launch.

And just for housekeeping, do you have this available as it relates to revenues from e-Gov for year-end and cyber security? Do you have that off hand?

Let me look. One moment, please. Okay. Okay. And you guys will see this soon in our annual filings, which we would love to finish up soon and put out. But essentially, e-Gov declined from $1.9 million to $1.7 million, cyber security from $2.2 million to $1.6 million and IoT grew from $7.6 million to $8.9 million. These are still unaudited numbers. Our audited numbers will come in 20-F filings, which we expect to complete soon.

[Operator Instructions] Your next question is coming from Dylan Gallagher.

So in a PR on March 9, you put out that you plan to release a new version of a proven, robust and scalable, cyber security software technology with enhanced protection from cyber attacks. Do you have any updates on when you plan to release that of any sort? And also my second question if you do have time to answer that is do you have any revenue projections for the year 2022 overall?

Thank you. Dylan, first of all, we currently don't provide guidance and revenue projections. We've gone through a transition from our legacy business to our new business. The first year with growth. And we're still putting things in place, but we do expect to have more project wins and to continue deploying and executing our business plan. Regarding the cyber security solutions, we have close to 15-year experience with our software and our consultancy -- cyber consultancy practice. And as of late in the previous months, we see a lot of heightened demand and need from enterprises around the world to secure themselves from various threats. We are releasing a new version, which is more secure and more customized to some of the current threats. We don't have an exact time line on that. later in 2022. But meanwhile, our existing solutions and software would provide great support for the threats as of today and in the past as they've been doing for many years. And we're happy to be able to support our potential existing and new customers around the world where there's cybersecurity needs, given our extensive experience and expertise in this space.

[Operator Instructions] At this time, we will pass the call back to Ordan for closing remarks.

I want to thank all of you for participating in today's call and for your interest in SuperCom. We look forward to sharing our progress on our next conference calls, filings and press releases. Thank you very much, and have a good rest of your evening. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.