SuperCom Ltd Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the SuperCom Quarter One 2021 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 one 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, Darryl. 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 and Form 6-K and SuperCom’s press release for the Company 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 reconciliation of these non-GAAP financial measures 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 is now my pleasure to turn the call over to Ordan Trabelsi. Ordan, please go ahead.

Thank you, Scott. As you are aware, we had an earnings call just less than a month ago for our 2020 results. So, I will keep it short and sweet. When I started my new role as 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 scale to improve profitability over time. I also stated a 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 quarterly 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 continued improvements to our financial reporting processes. Our investments in sales and marketing will be focused primarily on our IoT segment, which we believe has significant opportunities ahead. Since the COVID pandemic began, we have seen several trends that we believe will drive future demand for IoT tracking technology. First, as COVID began its initial spread, correctional institutions, many of which are already overcrowded, began seeing spikes 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 monitoring solutions that were being implemented to reduce the burden at correctional facilities, helping with the overcrowding problem and minimizing COVID infections. An article published last time by Bloomberg cited that the number of prisoners wearing monitoring bracelets increased by 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 of government to realize the benefits of this solution. Not only are they effective in controlling and helping with reentry of offenders, but they’re also cost-effective as it significantly reduces the financial burden of managing the incarcerated population. As a result of these trends, we have seen increased activity in various governments looking to implement this solution. 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 the government of Latvia; and the states of Alabama, California, and other states in the southern United States. Earlier this month, we won a new project in California valued at up to $4 million. We believe that we are just beginning to see a big wave of governments looking for effective, cost-efficient ways to address overcrowding, high costs of incarceration, and the cycle of recidivism, where essentially those prisoners who are incarcerated, upon completion, come out of prison and are likely to commit crimes again. This process helps to break that cycle. In addition to these home confinement solutions, the same technology enables us to offer effective quarantining solutions, which is our PureCare offering. This product enables governments to manage the spread of COVID-19 through self-quarantine, by enabling government authorities to monitor the movement of people that have been exposed to the virus, traveling from other regions. The solution is able to track people’s location within buildings, vehicles, and outside, and to verify if the person has maintained the home quarantine requirement, essentially verifying whether they have met the 10- to 14-day quarantine without breaching their private information. Since our launch, we have received significant interest and recently won an award with the Israeli government for a project valued at up to $3 million per month, once it goes live in the Ben Gurion airport, with an initial term of three months. Our win rate when bidding on competitive electronic monitoring projects in Europe has been over 64%, a testament to our secure technology and our highly regarded reputation in the industry. We will continue to invest in our technology to offer the best solutions technologically on the market. It is important to note that the revenue generated from these contracts is primarily recurring in nature, as they are priced on a per-person-per-day usage basis, primarily during the term of the contract. This contract structure provides SuperCom with a revenue stream that is generally stable during the contract period. In 2020, we shared that 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 significant opportunities for our IoT Tracking Solution segment. 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 against. Our revenue in the first quarter was approximately $3 million. This primarily represented our IoT Tracking segment, which has been our focus. Our gross profit in the first quarter was $1.7 million, which represents a gross margin of 55%. Operating expenses were $1.8 million, resulting in an operating loss of approximately $182,000. But, given numerous acquisitions in past years, our amortization expenses were significant and 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 strengthen our balance sheet, we converted some subordinated debt to ordinary shares, which helped reduce our net debt at the end of Q1 2021 in comparison to the end of 2020. We invested in more inventory to support the faster deployment of new projects. Our working capital increased to $12.7 million at the end of Q1 2021 from $5.3 million at the end of 2020. With that, I’ll turn the call over to the operator to begin questions and answers.

Our first questions come from the line of Ronald Capital.

Yes. Good morning. Ordan, you bring up some good points about the COVID pandemic and how it is a significant impetus to your overall business. I wonder though, with all the travel restrictions, and as you pursue international contracts, have 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, is that a potential catalyst for additional contract signings? Thanks.

Great question. We saw a lot of different forces work throughout the pandemic. Firstly, when the pandemic started, we saw a lot of nations looking to release from prison; they went to their existing provider of electronic monitors and then asked them if they could generate thousands more units and quickly put them on. It was very hard, because it 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 governments’ focus, traveling, 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 proposals to RFPs. We won an RFP in Israel for PureCare; we won an RFP in California for a project up to $4 million. On the negative side, there are various decreases in active counts in regions in the U.S. Last year in California, for example, a lot of courts were closed. So, we had a harder time getting more active clients because they weren’t sending us potential enrollees to the program or house arrest. So, it’s a mixed bag. What we did see altogether, which is very interesting, is there’s been a lot more exposure to home confinement tracking on people’s locations to understanding the value in house arrest and GPS monitoring. A lot of governments are becoming more comfortable with the concept. We already saw a trend of growth, because government officials that have tried this over the years saw how effective and positive it is to get over the fact that technology is becoming better in the field of location tracking, and there is just a general policy shift to get people more out of prison and to help with reentry, not just with tracking but also with employment services, and with anger management and other required techniques that people need when they come out of incarceration. So, the general shift has already been there. This gave it sort of a spike, the booster forward. We are actually looking at the electronic monitoring market together with the quarantine compliance market. Even though there’s a vaccine in many places right 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 are currently restrictions in 9 or 10 countries around the world for travel, for example, from India or Ukraine traveling to Israel. Even if you’re vaccinated, you are still required to do quarantine given the risk of the variant 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 noted a 65% win rate, which is obviously very impressive, so. But, is it fair to say that you think that the RFP pace on a global basis might be picking up?

This year, we certainly saw an uptick in RFP activity and proposals that were put out compared to 2020. So, we’re seeing things pick up for various reasons, and that gives us more opportunities to win. In the industry, there are roughly 10 players who can provide this technology; there’s a very high barrier to entry in this industry. Google or Apple can’t just come in one day and start bidding on these projects. A company has to show 5 to 10 years of experience doing exactly this tracking of offenders using the technology effectively, understanding all the complexities and challenges when deploying these kinds of programs—and only then can we bid. We alone in the projects we bid on have won over 64%, 65% in the past years, which is great, considering the amount of players we’re competing against. So, as the amount of RFPs that come out increases, we think that gives us more and more opportunities to win. A lot of this is just referrals from one country or one region to another; more people trying our technology, they like the results and they tell their colleagues and other governments in similar roles, leading them to come to us for various RFPs or other procurement opportunities; sometimes an RFP is not required in various states.

Thank you. Our next questions come from the line of Zvi Rhine, Sabra Capital Partners.

Hey. Good afternoon over there. I’m not sure you would 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 of May until the flare-up occurred. Are there any updates subsequent to the ceasefire?

Currently, we’re still in a similar state regarding the project. We worked on the initial integrations and some other elements required for the project. As we announced, we had a successful pilot. When it came to large-scale projects, more integrations are required from various departments of the Israeli government. We’re waiting for an official go-live for it to proceed in Ben Gurion airport. Various political and geopolitical situations in Israel have held this up a little bit, and we’re still waiting for an update. We are ready with the units and the technology integration to go live at that time.

Thank you. Our next questions come from the line of Spencer Kirschman with H.C. Wainwright. Please proceed with your questions. Spencer, can you see if you’re on mute, please?

Hi, Ordan. Sorry about that. I just want to see if you had the share count at the end of the quarter.

I don’t have that currently. We typically are filing every six months in a year. As a foreign issuer, we have all equity statements and the exact count. We started getting into quarterly reporting now; we wanted to get P&L and balance sheet done first. But in future times, we’ll have the exact shares.

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

Can you refine the question a little bit? What do you mean by upfront costs and volume?

More so like cost to implement technology, things of that nature.

The underlying technology is one that we’ve been developing for many years for tracking offenders. This is a very specific use case; we’re not actually tracking the location everywhere. We just find out if they’ve been at home or not, as long as they have the bracelet on their wrist. If they’ve been at home for 10 to 14 days, we give a signal that they comply with the program. We don’t track any information; everything is deleted afterwards. There’s a lot of sensitivity around privacy; these are not incarcerated individuals. We have increased our production capabilities to be able to produce up to 1,000 units per day—that’s probably the fastest in the industry by far. Our unique architectural solution and the fact that we can manufacture a lot of it in Israel helped us reach this level and this capability. We’ve manufactured and the government has provided us estimates for what they believe the amount of units will be. We manufacture accordingly, not the format but just the head start, and we have the capacity for manufacturing very quickly once this goes live. So, we have the initial quantities for the start, and then we will create more as we start to flow.

And are you able to give any guidance on future projects, kind of like an outlook on gross margin as well?

What, any guidance on future project gross margin?

On future projects throughout 2021?

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, basically. So, we don’t know what’s going to come through. We’re optimistic; in the last few years, we won around 10 new projects every year. This year, we started announcing some wins or we expect to announce more wins of various sizes. It’s interesting that every time you have a win, that’s another reference. Initially, you couldn’t bid on a lot of these projects because we didn’t have the necessary references. They want to see how many units you can deploy and for how many years you’ve had them. Especially with projects like the PureCare project in Israel, we have the ability to deploy many units and use that as a reference, allowing us to win more and more projects.

Okay. It’s really helpful.

What is interesting is that we have won a lot of our projects based on our technological capabilities. We didn’t have a very big sales and marketing team, primarily bidding on RFPs, and our technology scores typically very high. Now, we plan to invest more in sales and marketing, and we believe that together with our technology, will allow us to consistently obtain a larger market position in this already growing field. We believe there is good potential there for us to gain a stronger position.

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

In a very simple manner, actually. We had a very small amount of people working on sales and marketing because we couldn’t support all the deployments with the management of customers. Even when the RFPs 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 manner. Now, we’ve secured financing through various channels, as we described. We have a strong balance sheet. This project, for example, in Israel, we would have never been able to do a year or two ago—just the amount of cash required to manufacture all these units would not have been possible. Now we can do that and we have the capacity to bring on more sales and sales support personnel to take on more projects that will require cash in the short-term because projects take cash for 6 to 12 months, but then generate very strong positive cash flow for the next years to come. These projects usually have a five-year duration or so until, after 6 to 12 months, you switch over to positive cash 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 to sharing additional updates and having quarterly calls in the quarters to come. Thanks 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.