SuperCom Ltd. (SPCB) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to SuperCom's Second Quarter of 2023 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. With me on the call today is Ordan Trabelsi. SuperCom's President and Chief Executive Officer. I'd like to remind you that during this call, SuperCom 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 recently filed periodic report 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 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 reconciliation of this non-GAAP financial measure to net loss, a comparable GAAP financial measure, please see 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 content of this call contains time-sensitive information that is accurate only as of today, July 31, 2023. 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 morning, everyone, and thank you for joining us today. Earlier this morning, we issued a press release of our financial results for the second quarter of 2023. You can find a copy in the Investor Relations section of our website at supercom.com. Today, I'll start my comments with a brief update on our recent business highlights strategy and Q2 results, followed by a Q&A session. The second quarter was an outstanding one for SuperCom, making our fourth consecutive quarter of remarkable year-over-year growth and positive EBITDA. We're delighted to announce a staggering of 141% year-over-year revenue increase, reaching a 5-year record quarterly revenue number of $7.7 million and non-GAAP EPS of positive $0.07 as we continue to execute our project pipeline and introduce new products and services to the market. During the past year, we won several important contracts in the U.S. and Europe, and we're excited about the opportunities we see ahead. I'll go more into details in a few moments. But first, for those new to SuperCom, SuperCom's mission, is to revolutionize public safety worldwide through proprietary electronic monitoring technology, data intelligence and complementary services. With over 35 years of experience since our founding in 1988, we've been a trusted partner to dozens of national governments worldwide, providing cutting-edge electronic and digital security solutions. Our strategy has been to lead with our technology, to develop top-notch solutions, expand our presence and deliver outstanding services. This approach has been proven successful driven by the following key factors. One, our proprietary electronic monitoring technology scores highly in competitive government tenders and support various programs such as house arrest, GPS monitoring, rehabilitation services, domestic violence prevention and more. Since 2018, SuperCom secured over 50 new multiyear governmental projects with project wins valued at over $40 million in 2022 alone. Second, our strong reputation and recognition as a premium provider of electronic monitor technology and services also contribute to our win rate. Each new customer win and project deployment further strengthens our competitive position. And third, our management strategic focus and attention on our IoT tracking business in developed countries with the opportunities to create. The electronic monitoring market is estimated to reach $2.1 billion by 2026, up from $1.2 billion in 2021. The U.S. and Europe constituted about 95% of these markets. In Europe, there's been an increase in government tender activity with over $200 million in project bid opportunities in the past 18 months. These successes and opportunities have resulted in a growing business pipeline, with over 70% recurring revenue for SuperCom in 2022. In Q2, we continue to invest in R&D to ensure our products remain the most competitive in the market, continuously introducing new features and technology for proprietary platforms. These efforts led to the successful development and deployment of 2 brand-new solutions, PureProtect and PureOne. PureProtect, is a life-saving domestic violence monitoring solution. This innovative solution addresses domestic violence issues and further enhances the company's portfolio of products and services. PureProtect has undergone a rigorous testing and has been successfully implemented in multiple projects including Romania's $33 million EM project. The second is a PureOne, an all-in-one state-of-the-art GPI tracking ankle-bracelet monitoring solution to integrate comprehensive monitoring, capabilities into a single device. With its slightly designed longer battery life, remote charging, high precision and future proof features, the PureOne offers a more efficient and effective electronic monitoring solution. This product also expands the company's addressable market. We've been very pleased with the early reception and traction of our newer solutions and expect them to help facilitate the rapid expansion of SuperCom into the U.S. market. To support SuperCom's growth, we not only maintain its technological advantage but also invested in enhancing its operational infrastructure. Furthermore, we bolstered the company's global sales efforts by recruiting a new sales team with industry experience shifting from passive bidding to an active outreach strategy. Through the past -- throughout the past 12 months, we announced many new project wins in the U.S. and Europe. SuperCom has continuously displaced in incumbent vendors with an over 65% win rate in European competitive tenders. These achievements were particularly notable given the economic uncertainty and market volatility caused by the potential recession and unstable geopolitics. However, SuperCom is a good candidate to be a recession-resistant due to the factors such as high recidivism rates of roughly 75%, prison overcrowding of over 100% and soaring incarceration costs of nearly $80 billion in the U.S. alone. In 2020, the U.S. alone spent over $80 billion I just mentioned, to keep approximately 2.3 million people incarcerated, which equates to nearly 0.5% of the entire U.S. population. For these reasons, among others, we see a growing global trend of government turning to innovative solutions and alternative to incarceration to ensure public safety. The company's PureSecurity security technology suite has been designed to address this trend, offering an effective way for institutions to enforce home confinement, each prison overcrowding at lower cost significantly. For example, the total daily costs for monitoring on offender on home confinement or GPS monitoring is approximately $10 to $35 compared to a much higher cost of $100 to $140 at a correctional facility. Most importantly, home confinement has been shown to reduce recidivism, highlighting its effectiveness in helping offenders improve their lives and communities. On top of these growth drivers, we have witnessed a surge in adoption of victim protection solutions worldwide, which aligns perfectly with our strategic plan and the launch of our new product solutions, PureProtect. In the European market, SuperCom expanded its business into over 10 countries and secure significant new contracts, which are typically awarded through competitive tender processes. SuperCom launched a $3.6 million national EM project in Finland with the national government in Q1 2023. And by May 2023, the PureSecurity EM suite was fully deployed in Finland covering all offender programs, house arrest, GPS, and inmate monitoring. Notably, the company won the largest industry award for the year of a national electronic monitoring project in Romania -- the first electronic monitoring program in Romania valued at $33 million, which includes up to 15,000 monitored offenders per month for up to 6 years. We've also launched our domestic violence solutions in the European regions and our plan to launch them in the U.S. too. In Israel, there is a high potential for new domestic violence program as the government has just passed this week, a law requiring domestic violence offenders to be monitored with technological advances such as ours. Although SuperCom already does business in multiple U.S. states, we are actively focused on further expanding our presence in the U.S. The company strategically prioritize the expansion of PureOne into new markets and geographies. It's already received high praise during this introduction in various regions in the U.S. for Q1 has been successfully deployed and is actively utilized to monitor live offenders today. Moreover sale activities of PureOne have commenced in promising new markets outside Europe and North America. Our strategic sales team and new wins have been the first step 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. And as we talked about before, we believe there's also opportunities to enhance our U.S. growth through strategic acquisitions of local electronic monitoring service providers with a strong reputation and customer base in their respective local markets. We constantly monitor the market for potential acquisitions that could generate significant value by immediately expanding market presence and providing vertical integration synergies. Our acquisition of LCA in 2016 for $3 million is a great example. The successful acquisition has proven to be a great value through the over $30 million of new project wins which has generated in California since acquisition alone and improvements to operational margins with operational efficiencies and introduction of our technology into LCA's operations. I'll now turn over to the financials. During our previous conference call, I mentioned that we were anticipating a contribution to our financial results in the next quarters from the projects we discussed. I'm delighted to share that our revenue has recorded a remarkable year-over-year growth of 141% and manage a 5-year record revenue of $7.7 million in the second quarter, marking the fourth as consecutive quarter of high year-over-year revenue growth. Moreover, our 12-trailing month year-over-year revenue increased by 106% to a staggering $25.5 million with our IoT division being the primary growth engine. To put things into perspective, while the global electronic monitoring market grows at approximately 11% per year, SuperCom, IoT revenues achieved over 100% growth in the past 12 months, outpacing the global market growth by over a multiple of 10x. This growth is a testament to the fact that the product market prefers our solution over those of alternatives. Furthermore, we are proud to obtain positive EBITDA in each of the last 3 years, 2020 to 2022 and achieved EBITDA of $0.9 million in the second quarter of 2023 and EBITDA of $2.5 million in the trailing 12-month period ending in Q2 2023, which resulted from operating leverage, targeted spending and high year-over-year increases in revenue. The following is a comparison between the financial results of the second quarter of 2023 and the second quarter of 2022. Gross profit increased by 77% to $2.3 million compared to $1.3 million, driven by new project launches. Initial project stages incurred higher expenses, while advanced stages yielded higher gross margin. As the project pipeline matures, we expect an upward trend in gross margin based on the evolving project portfolio. We achieved a $350,000 decrease in total operating expenses through operational optimization efforts, including onetime and other expenses. We decreased our R&D expenses by $80,000 while we continue to develop and launch new products and improve existing ones, keeping us at the edge of innovation and technology leadership in our space. In addition, our sales and marketing expenses decreased by $200,000 and general and administrative expenses decreased by $55,000. The company had an operating loss of $658,000 versus an operating loss of $1.75 million in the previous year period resulting from significant increases in our gross profit and a slight decrease in our operating expenses. The company's EBITDA improved by $1.6 million to $0.9 million compared to $0.7 million loss in the previous period, reflecting the benefit of our operating leverage associated with higher revenues deploying new IoT projects and a continued shift away from the legacy business is achieving underscores our focus on sustained growth and profitability. Our net income improved by 63% to a $1.1 million loss compared to a $2.8 million loss in the former year period. And our non-GAAP net income improved by $2.2 million to a $0.3 million profit compared to a $1.9 million loss in the previous period. Positive non-GAAP EPS improved to positive $0.07 compared to negative $0.50 in the former year period. Our cash position is stable. We have credit facilities in place to reduce our need for cash as we continue to win and execute projects. And as these big projects start on, there's a cash used for manufacturing equipment, which later turns into high cash flow generation in the later phases of the project deployment. In addition, the company has had onetime expenses $230,000, mainly pertaining to the legacy business and allowance of doubtful debt. In closing, we're excited about the growth we're experiencing and about the growing demand for our products. After 5 years through which we transitioned from our legacy business to the IoT tracking of offenders business, we finally see the shift to rapid growth in revenue and believe that we're well positioned for continued growth by capitalizing on the many new opportunity for us. These are being driven by multiple factors, including our strong presence and reputation in the U.S. and European markets, the power cyclical nature of electronic monitoring industry, the growing public policy shift to monitor offender incarceration and the return to post-COVID levels of business activity. We anticipate sustained growth by further expanding our market share in the U.S. and Europe, our commitment to preserving our technological advantage and a robust growth foundation remains steadfast as we continue to invest in these areas. With that, I'll turn the call over to operator to open the call for questions.

[Operator Instructions] Your first question is coming from Matthew Galinko of Maxim Group.

Can you start with PureOne, when did that become available in the U.S.? And I guess, did you mention that it's already deployed in places? Or when can we expect to see, it begin to be deployed?

Great. Great question. And let me preface that with a little bit of explanation on PureOne. So we started our main focus in technological advances in the European market where we had the [ PureCom] solution and PureTrack which works in smartphone. In the U.S. market, historically, a lot of the judges like all-in-one solution. And we created a brand-new PureOne solution where it's all in one, but it has longest battery life, has a mobile charger, it lightweight, has the best -- we believe the best tracking and that has accuracy in buildings and underground and things that we've never seen in the market before. So far, we've given it to some of our potential resale partners, including LCA and seen very, very good responses and feedback and it's actually running on live offenders in various places in the U.S. We haven't done a massive launch yet. It's still in small launches in various locations in the U.S. And so far, it's working great. The feedback is great, and we expect that this will be a very strong market driver for growth in the U.S. and other regions in the world where we're looking for all in one solution.

Got it. That's helpful context. Can you help us understand maybe the structure, maybe the -- how you think about the pipeline with PureOne and now being, I guess, more appealing to the U.S. market with that product versus some of the larger pipeline activity that we know of in Europe. How do you think about those 2 buckets of classical -- revenue and opportunity over the next year or 2 years?

Good question. So we had, in Europe, over $200 million pipeline of opportunities in the European market. Some of the larger opportunities in the U.S. market, we have not been on and some of them had some restraining factors such as the requirement of the 1P solution as well. Now our suite -- our PureSecurity suite has the PureTrack, which is a 2P solution, with a smartphone, with a bracelet, and has domestic violence, it has alcohol monitoring. And now finally, this last piece that we were missing for a lot of potential opportunities. So all in one solution, we can right now meet with our PureOne. So that essentially opens up our market opportunity by multiples, probably a 3 or 4 places that we could have been before. So right now, we're evaluating these opportunities, whether it's the government tenders or resellers that want to try the technology that's in the U.S. or all the other areas around the world, but our pipeline of opportunities can grow significantly. And we just -- right now, just in July, started actually deploying it into the U.S. It's brand new. It's working great. But we'll see in the -- during the quarters and years ahead, how this release starts to propel our business going forward and complements what we've been doing already with other technology solutions, mainly in Europe.

Got it. Okay. That sounds good. And maybe last question from me. Just -- you touched on adding outbound sales in the last year, 1.5 years, I think. Can you maybe touch on how you structure incentives for sales, particularly maybe in the U.S. where it's a little bit more fragmented. Is there a commission structure? Or how do you incentivize people to go out and sell the PureOne or the different products?

Good question. Let's split. So our team, we very common form, we have commissions and we have on target quotas for the salespeople. And if they surpass the quotas, they get acceleration, if they don't meet the quotas, there's the acceleration on their commission. But beyond that, we also work with resellers who do the selling for us because -- for example, LCA sells to many counties in California And aggregates all of them together into one. There's many other providers like that around the U.S. to do the same thing. And they -- of course, care about stability and good products and they also care about technological advances. And they have the ability to switch over if they have 1,000 clients that they're monitoring on GPS. They have the ability to switch them over almost immediately into new technology and they're continuously evaluating the best technology out there, and they love to value our technology. We've -- in various situations provide them technology. And now with the PureOne, we've received very good feedback and now allow them to quickly move over. And as they deploy 10, 50, 100 units and if you get it works great, then they could deploy larger scale into more units.

All right. So I'm sorry, one more question.

What was the second part of the question, if I missed it.

It was really about incentives per sale, but I guess just final question is on now that you have resellers evaluating PureOne, when do you expect them to -- how long do you expect it to go from evaluating those 50, 100 units as a trial to starting to swap or make a primary decision to deploy PureOne going forward?

Yes. It's a good question. I don't have exactly the crystal ball for that one. It depends on -- so far, they're seeing tracking points of higher accuracy than ever seen. They like the mobile charger. They like the design, ergonomic people are very, very excited about it. Still it's public stage fees, just so there's some caution. People want to make sure that things are working and they're stable. They don't overnight put in a 1,000 new offenders. But just like in the European market, we started with Latvia and Lithuania $100,000 projects, and now we're closing projects of $33 million step by step, when they see more and more counties and states taking on the same technology, and they all talk to each other and they power each other a lot, who is the work, how you like and it works well, then you start to see a huge increase. And so we still have our pipelines in Europe, and we're still the growth that we see today, 141% growth quarter-over-quarter, that's mainly from Europe. We're still seeing that. And on top of that, we still have our growth in California from the -- because we have a good presence in California with our services and our abilities there. But now we have a whole brand new growth driver into growth throughout many counties and space in the U.S., and a lot of that is propelled by technology. Just like in Europe, we grew their technology. We don't have strong relationships in Sweden or Denmark or Bulgaria or Latvia Lithuania, it's all based on tech. We put the tech out there, they put in their hands, they liked it, they loved it, they bought it and displace other vendors that have been there for 20, 25 years sometimes. So we're doing the same thing. Just in the U.S., it can move faster because instead of waiting for the national tender, the [indiscernible] give an opportunity to move faster than a formal government national tender. So we expect the growth in U.S. to move faster because of that and also because we're already an accepted vendor and well known in the world, whereas before in Europe, we're kind of brand new to the industry 5, 6 years ago. So we expect this to move faster, whether it's a quarter or 4 quarters. We don't know yet what to see, but I think the results would be nice.

Thank you very much. [Operator Instructions] Okay. We don't appear to have any further questions in the queue. I'm now going to hand back over to Ordan for any closing remarks Ordan? Ordan. If anyone does have any questions at all. [Operator Instructions]. Okay, we don't appear have anybody in the queue at the moment, I can pass now back over to Ordan for his...

Okay. I want to thank you all for participating in today's call and for your interest in SuperCom. Please contact us directly if you have any additional questions. We look forward to sharing our progress with you on our next conference call, filings and press releases. Thank you very much, and have a good day.

Thank you, everybody. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.