SuperCom Ltd. (SPCB) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the SuperCom Third Quarter 2022 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. I'd now like to turn the call over to Stephanie Prince of PCG Advisory.

Thank you, operator, and thank you to everyone joining us -- with me on the call today is Ordan Trabelsi, SuperCom's President and Chief Executive Officer. I'd like to remind that during this call, SuperCom's management may be making forward-looking statements, including statements that address SuperCom's expectations for future performance or operational results. Forward-looking statements involve risks, uncertainties and other factors that [ may cause ] SuperCom's actual results to differ materially from those statements. For more information about these risks, uncertainties and factors, please refer to the risk factors described in SuperCom's most recent 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, a non-GAAP financial measure that SuperCom [Audio Gap] 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 [indiscernible] the reconciliation table located in SuperCom's earnings press release that accompanies this call. Reconciliations for other non-GAAP financial measures and comparable GAAP financial measures are available there as well. The conference call contains time-sensitive information that is accurate only as of today, October 26, 2022. Expect (sic) [ 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, and good morning, everyone. Thank you for joining us today. Earlier this morning, we issued a press release on our financial results for the third quarter of 2022. You can find a copy in the Investor Relations section of our website at supercom.com. We continue to maintain our commitment to time to quarterly reporting and for our quarterly review, I'll start with a brief update. On our recent business highlights, strategy and Q3 results, followed by a Q&A session. The third quarter was a great quarter for SuperCom with 102% revenue growth year-over-year with $6.3 million revenues in Q3. We won several important contracts in the U.S. and Europe, and we're excited at the reception and early traction of our newest product, Pure1, a highly innovative and investor-breed [ IPPI ] tracking device. I'll go into more details in a few moments. For those new to SuperCom, since our founding in 1988, 34 years ago, SuperCom has been a trusted partner providing cutting-edge electronic and digital security solutions to dozens of governments worldwide. As part of our mission, we strive to revolutionize the public safety sector worldwide, the proprietary electronic monitoring technology, data intelligence and complementary services. We always lead with our technology and enter in 2022, we continued to invest heavily. -- in research and development to ensure our product remains the most competitive in the market. We're continuing to introduce new features and technologies through our proprietary platforms, such as unique biometric and communication capabilities and much longer battery life. In parallel, we launched an entirely new solution for domestic violence. In recent years, we've become more and more aware of their [ immense ] challenge, which is that nations and governments worldwide face when dealing with their [ offended ] populations. First, many countries suffer from high recidivism rates, when people relapse to more criminal behavior after finishing their sentence, clogging the criminal justice system. Second, overcrowding is a key contributing factor to poor prison conditions worldwide, resulting in prisoners sleeping in shifts on top of each other or sharing bed. Third, in 2022 about $80 billion were spent in the U.S. to keep roughly 2.3 million people incarcerated, nearly 1% of the entire U.S. population. Beyond that, societal cost of incarcerations, lost earnings, adverse health effects and more are estimated at 3x [indiscernible] cost at least. Unfortunately, these issues aren't unique to the U.S. and are prevailing globally. It is evident that prisons are far from ideal for solving many challenges in criminal justice. To help meet these challenges, we have leveraged our technology and services expertise and government security and experience team focus on the public safety sector. We're seeing much success. And in just the past few weeks, we announced that we won and launched a $33 million national electronic monitoring project in Romania. As part of the project, the SuperCom [ domestic violence ] solution on one hand, the security for those getting hit or hurt by their own family members. -- with an immediate notification of the police and to the victim the offender has come within close range, posing a threat to their safety. With up to 15,000 monitored offenders per month, this project will help protect so many people and we feel honored to have the opportunity to do this. The project alone can change so many lives. We also recently announced that SuperCom was awarded Croatia's first national electronic monitoring project, which we have already launched. In addition, we secured a new contract for Sweden's Juvenile National Electronic Monitoring project, the third and final remaining national EM contract in Sweden, all held by SuperCom as of now. In parallel to our success in the EU in the past quarter, we continue to expand into the U.S. and we won 3 additional new contracts across 3 different U.S. states, Texas, Southern California and Idaho. These wins are great for SuperCom, and they further increase SuperCom's footprint in the U.S. facilitating more growth in the future. Furthermore, the recent win in Idaho represents our third win and certain new customers in Idaho in less than a year adding to organically growing customer base and signaling just how rapidly our technology is [indiscernible] to adjacent customers. Our strategy has been a build amazing technology, expand our presence and deliver outstanding services. We have successfully executed our strategy by focusing on the following key factors. Our proprietary electronic monitor technology scores highly and competitive RFP and supports various programs such as house arrest, GPS monitoring, rehabilitation services and more. SuperCom's won over 50 new multiyear government projects since 2018. Our strong reputation recognition is a premium provider of electronic monitoring technology and services also contribute to our win rate. With each customer win and project deployment, we further strengthen our reputation, making us even more competitive. Lastly, our strategic focus and management attention have shifted to our IoT tracking business with recurring revenues in developed countries. -- electronic monitoring market was valued around $1.1 billion in 2020 and estimated to reach $1.6 billion by 2025. The U.S. and Europe constitute about 95% of this market. In Europe, we have recently seen an uplift in RFP activity with an expected over $200 million in upcoming bid opportunities in the next 18 months. Altogether, these successes and opportunities have resulted in a growing pipeline of business and a recurring revenue rate of above 80%. More broadly, we see a global trend of government turning to innovative solutions and alternatives incarcerations to ensure public safety. And our PureSecurity Technology solutions address these trends by providing an effective way institutions to enforce home confinement while easing prison overcrowding. In addition, it allows them to significantly reduce the associated cost of housing an inmate. For example, -- the total daily cost for monitoring an offender on home confinement through GPS monitoring is approximately $10 to $35, substantially lower than $100 to $140 cost a day at a correctional facility. More importantly, home confinement has been shown to reduce recidivism highlighting its effectiveness in helping offenders improve their lives and making communities safer. Throughout the year, we've announced many new project wins, some in the U.S., some in Europe, where we have been continuously displacing incumbent vendors in an over 65% run rate in the European competitive RFPs. We are proud to have won so many new contracts in such a short period, especially in times of uncertainty and volatility in the market due to looming threat of recession and unstable geopolitics. Our business is recession-resistant in nature and the possibility of potential recession increases. We have multiple tailwinds to support resilience and growth in our business. In 2022, we strengthened operational infrastructure, grew our workforce and maintained our technology leadership. For example, amidst the ongoing stability in the global economy in the past few months, we essentially finalized the development of a new product. Pure1, as mentioned earlier. In addition, we have further owned our business plans, secured new contracts and raised the needed financial resources to support our company during the time of volatility and uncertainty in the capital markets. We have also strengthened the company's global sales division, recruiting a new sales team with industry expertise as we continue to shift in from passive bidding to an active outreach sales strategy. The new wins and our improved sales teams are the first steps in executing the company's U.S. market expansion strategy and have already driven increased activity with existing customers and numerous new demos and valuations of potential new ones. As part of our growth plan, we believe there's an opportunity to enhance our growth in the U.S. through strategic acquisition of local electronic monitoring service providers who have developed a strong reputation and customer base in the respective local communities. We constantly monitor the market for potential acquisitions that could generate significant value by immediately expanding market presence and providing vertical integration synergies. An example of this strategy is reflected to our $3 million acquisition of LCA back in 2016 and the immense strategic value and new project win it has provided us. We have won over $25 million in new projects in California since that acquisition in 2016 alone. Turning to our financials. In our last conference call, I noted that we expect revenue from the project mentioned above to continue [Audio Gap] to our financial results -- to contribute to our results in Q3 and Q4 financials as mentioned before. I'm happy to share that we recorded 102% year-over-year revenue growth to $6.3 million in the third quarter with our IoT division as a main growth engine. -- achieving 150% growth in the third quarter compared to the third quarter of last year. Revenue from developed countries continue to increase reflecting the completion of our 5-year business plan to transform our business from unstable emerging countries to developed countries. As a reminder, the legacy business comprised of onetime project revenues in Africa and South America, which is a sharp contrast to our IoT tracking business in developed countries, which generates recurring revenue of about 80%. Gross profit nearly doubled as well increased by 96% to $2.1 million compared to $1.1 million in the third quarter of last year due to high growth of project volume. Compared to the corresponding quarter last year, -- we increased our research and development investments of $333,000, -- while we continue to develop new products and improve existing ones, keeping us at the edge of innovation and technology leadership in our space. Our sales and marketing expenses increased by $195,000, which for the company's new productive growth strategy and general administrative expenses increased by $262,000 as we continue to expand our management team. The company had a positive EBITDA of $413,000 compared to $53,000 loss in the corresponding period last year, reflecting the benefits of economies of scale associated with deploying new IoT projects and the continued shift away from legacy business. We ended the third quarter with $3.1 million in cash and cash equivalents and restricted cash, which includes cash from approximately [ $1.74 million ] in gross proceeds raised in July due to exercise warrants by stable credit and institutional investors. This cash provides us with the liquidity we need to continue investing in sales, marketing and R&D to drive revenue growth and expand our global footprint. In closing, as reflected in our financials, we are starting to recognize a significant return on our years [indiscernible] sector. We believe that we are well positioned for continued growth and capitalizing on new opportunities fueled by these multiple drivers, including a strong presence and reputation in the U.S. and European markets. The countercyclical nature of our industry, public policy shift to monitoring instead of incarceration and returning to post COVID levels of business activity. Our recent announcement of new contracts in Europe and the U.S. are compelling examples of our successful business plan execution within a vertical that was SuperCom as a strong presence and excellent reputation. With that, I'll turn the call over to operator to open for questions. Operator?

[Operator Instructions] Your first question for today is coming from Matthew Galinko.

And congrats on the strong quarter. Maybe start -- can we start with maybe the U.S. win -- did they result from the new sales push that you talked about that started a couple of quarters ago. Is that starting to convert into these deals? Or is this sort of still the sort of deals you get by word of mouth or passive outreach?

Yes. The answer is yes, it is the results of the sales force. In the U.S., the market is more fragmented. So instead of bidding on large projects like Romania, which are [ $33 million ] or Sweden, which is $7 million. There, we have to kind of have feet on the ground and go opportunity to opportunity. And some of it comes to us at word of mouth. Some of it comes because we have good results in our previous projects and some comes from reaching out to new customers. Either way, we need an active sales team with an active proactive strategy. And they've been doing demos, evaluations and showing customers just how unique our technology is that's leading to wins, and we've been announcing them to share with the rest of the public.

Got it. Terrific. And then on the domestic violence component, is there an expected launch in the U.S.? Are you having -- are your salespeople having conversations about that piece? And is there early indication of interest in the U.S. market?

Let me quote one of our customers. He's a service provider and a reseller around domestic violence and he says verbatim "If you provide me with the domestic violence solution, I will sell the bananas out of it here in the U.S." So maybe that answers your question. Many customers are waiting for it in the U.S., many resellers are waiting for it. Our focus naturally has been to provide it first to the regions with larger revenues like the $33 million projects versus smaller ones. And it's being adapted also to meet the U.S. market needs and then it will be spread out through California and the Midwest and other states and locations. So it's in the process, and there's very high demand for it from what we see thus far. Do you understand how it works? I don't know if -- maybe I mention [indiscernible] how essentially...

Yes, no, please expand on that, if you could.

Yes. Okay. So different from our other solutions where you have a bracelet and you're on house arrest. Domestic violence is a little different and we're one of the only ones who do it in the world. Our bracelet, as you may remember, the battery runs for a very long time over a year. So if someone is hit or there's violence in the family, and they have a complaint -- in many countries, it changed the law to allow an immediate application of a bracelet, our bracelet, which is small and long battery life on their leg. So if someone hits, let's say his wife, for example, he gets a bracelet -- and any time he comes within 100 meters of her, her phone will notify her and the police immediately, such that we are effectively and dynamically enforcing restraining orders, which has never been done before. Now people have the safety and peace of mind that they can actually complain if somebody hits them, and they'll be protected with the use of this, I think, amazing technology. So it's -- others can't do it because the bracelet is too big and the person has to charge it every day and doesn't uniquely synergize with the mobile phone like ours does. So this fits perfectly with our infrastructure and many customers are seeing it and we think it's going to have a big impact on the market around the world.

That's helpful. And it sounds like a great solution. I appreciate it. Last question for me is on the single piece bracelet that you -- I think you mentioned you're seeing some early traction. Can you expand on that a little bit? Where is the traction? And at what point will we see that flow through in deals that utilize it or uptake with an existing deal.

You -- I didn't hear the first part that you said to me about traction where? With the Pure1?

Yes, yes, with the 1P unit.

Okay. Great. So we have our 2P solution, which is a small bracelet that run for a very long time without charging. It communicates with a smartphone. Some customers like just a 1-piece solution. There's no phone, just a piece of hardware on the leg. We develop that as well. We developed, of course, like everything else, we tried to make it the most cutting edge of industry, so we have the best features, the lightest weight, longest battery life, best connectivity and security. And we launched it first in the conference. -- in Europe earlier this year, and we already won a project with it in Sweden that we announced earlier this year. In the U.S., it's also very exciting and many, many customers are asking for it because together with this, they will have a full suite of tools. They'll have domestic violence, they'll have the 2P solution on the smartphone and they'll have the 1P solution, they'll have the alcohol-monitoring solution, they'll have the [indiscernible] monitoring solution. All of this works together seamlessly on the same management studio on the cloud. It's very, very helpful and effective for the officers who are using this technology rather than having to go to different software tools for every different hardware. Here they have all in one, and it makes it work much easier, much more effective.

Your next question for today is coming from [ Ken Weiner ].

The first thing I wanted to ask you about was the listing requirements.

Yes. And what is the question?

Well, basically, -- it's -- I think you're deficient in meeting the exchanges listing requirements.

Okay. So yes, let me answer if I understand your question correctly. We have not met the $1 minimum requirement from the Nasdaq Exchange. And we have essentially until if I'm not mistaken December 13 to correct that. We are taking the proper measures. It's more of an operational issue in order to get this done. And we are on it, we expect in time to have this resolved.

Well, when you say it's an operational issue, I mean the stock is $0.26 and you say requirement, it's $1. So -- so how do you fill gap? Excuse me.

We don't control the stock price. And if the stock price doesn't reach a level that is required. We also have an ability to do a reverse split and adjust the stock price that way to meet the requirements until December 13.

Okay. And secondly, obviously, it's a tough market out there and a tough environment, but the company has a market cap of $9 million. I've been a stockholder of the company for some time and own a fair amount of shares. And I was wondering what's your thoughts on that and what one can do to explain your story better, so maybe more people can get interest in the stock.

Right, good question. In the past, we had more time to meet with more investors and conferences and be more institutions and get the word out there. Lately, we've been extremely busy, as you can see, and we try to first focus on our operations. That's how we're winning these new projects. We just announced a few weeks ago, the largest project in Europe this year, we won it, $33 million that we just announced this quarter, double the revenues from last year from the previous quarter. The stock is now adjusted. Does that mean the market is valuing us correctly? I think not, but that creates opportunities for new investors to come in at this time and hopefully grow with the company as the stock over time will adjust to the proper value. I'm at a conference right now at a LD Micro conference in California, where we'll be meeting investors all day. And we will try to integrate these conferences and these communications with investors as much as we possibly can. But again, our focus will be on operations. and we have to create the long-term value of the company, which is more important than the general strategy than maintaining the immediate stock price at every given moment.

I agree with that. But -- so let's talk about going forward. I mean, obviously, it seems like this quarter was a breakthrough quarter for you. In other words, it seems that you're gaining traction and you're hitting some of the goals you set out. Is the quarter an aberration? Or do you expect future growth in the coming quarters.

I don't think it's an aberration. I think we have a strategy to grow our revenues from where they've been -- so at a high level, we had a business of e-Gov, which had revenues of close to $30 million and IoT was close to nothing. We grew that to close to $10 million while e-Gov has declined. And our strategy is to keep on growing that into tens of millions of dollars. So we don't think this growth is something unique that will not recur in the future. That being said, we don't control the growth in every quarter. We're dependent on the timelines [indiscernible] government customers. We're dependent on them choosing one to order the contracts, one to launch a project, and one to finish a significant milestone. We just launched a project in Romania, we've done a lot of work in this quarter. We continue to do work in following quarters, but we would not be able to control exactly what work will be done in each quarter. That also depends on our customers. Furthermore, we're bidding on many, many, many other projects around the world, in Europe and the U.S. and we expect to win many of them. And as we win, they will layer on to our recurring revenue base, which is over 80% and continue to grow our revenues. So our strategy is consistently to grow our presence. With that, we'll grow our revenues. And with that well the company will grow. This is just a nice example for people to see what can happen and much more than this can happen and how it immediately impacts our profitability, thanks to operating leverage. -- because we don't need to grow our operating cost structure significantly to add more projects and more units. This is up to 15,000 units. We could add tens and tens of thousands more units without changing almost anything to our operating structure, maybe adding a new person here or there. But everything will result from operating leverage and profitability will come and the contribution margins of each additional bracelets, let's say, is very high.

And what about the debt maturities? Are you able to service the debt? And how bad are [ maturities ] on debt.

The [indiscernible] our current majority is around December 2024. And we believe our creditors see our vision and they believe in it and they worked with us to adapt the structure and the requirements to the goals of the company. We will be able to service the debt over time. That's not our current focus right now as we're also very much focused on growth. But in time, we'll be able to handle it and they believe that as well.

And the last question is, what are your terms of the contract? What is the -- what's your accounts receivable total right now?

Let's open up PR, but I think it's around $13 million.

How much?

One second. I think it's around $13 million, I have to get the exact number.

So if you're selling $6 million and you have accounts receivable, $13 million, then what are your terms?

Well, the way the way that works is a little different than a normal business. The trade receivables at the end of this quarter were $13.7 million. The way that typically works, we have large project deployment. And when you're deploying a large project, you get paid when you reach certain milestone. So we recognize some of the revenue as a percentage of completion. So for example, we can deploy in one quarter, a ton of the work, recognize some revenue for that work, and we still don't get paid. Not that it's overdue. It just hasn't been billed -- it's unbilled revenue. Most of our customers in the U.S. and in Europe are very timely payers. This is one of our goals for moving to the developed countries away from Africa and South America, where we had more delays. Some of our trade receivables are still from those old revenues from the e-Gov business. Some of them have been written off and discounted. But the new revenues from the IT tracking business have actually been very timely payers. We're happy with that.

And the last question is what -- on the big contract that you landed for $33 million, when do you start to recognize revenues for that?

We already have started. When you see that...

Oh, you have.

Yes. The go-live was early October. Probably one of the fastest go-live projects in the world in this space, and it's a brand new country they've never -- brand new EM country, they've never done electronic monitoring. And we're excited that we're able to support them to launch such a huge project so fast without any experience in EM for them. It's a great win for us and for them. They did a great job. And we think this is another capability that we bring with us to future projects. Not just great technology and great services, but also great execution with a very timely deployment.

And the other question is, when you're dealing with governments and -- do they -- is your financial condition or your stock price an inhibitor for landing deals?

At the time if they talk to us, and they usually do. Once they talk to us, they get comfortable. If they have technical limitations, we could team up with other vendors. They usually have a local partner who speaks the language and works with the government. They're usually much larger companies, telecom providers, IT providers, [ dealing ] up with them is financially perfect.

Your next question is coming from [ Zee Rhine ].

Congratulations on the Romanian win, I know how valuable that is to your business. As it relates to, you said that, that you're already generating revenues. Were any revenues from that project actually recognized in the third quarter?

Yes.

In the $6.3 million? Can you tell us how much of that was and how much [indiscernible]?