SuperCom Ltd Q4 FY2021 Earnings Call

Ladies and gentlemen, good day and welcome to the SuperCom 2021 Annual 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. 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 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 a press release on our financial results for the fourth quarter and full year 2021, a copy of which will be available in the Investor Relations section of our website. We are proud of our achievements over the past year, especially since I entered the new role as President and CEO in February 2021. For the first time in five years, instead of double-digit percent declines in annual revenues, we achieved growth in annual revenues. We also generated over $2 million in EBITDA, enhanced our operational infrastructure, strengthened our workforce for future growth, and maintained technology leadership. We raised the needed financial resources to support the implementation of our business plan with new longer-term financings under preferable company terms. We settled all disputes, cleared all payables and reorganized legacy parts of our company for improved efficiency. We own our business plan and aligned our customers, partners, and employees with our mission and goals. In a global environment riddled with the uncertainty of a global pandemic and geopolitical crises, we feel confident about our future. Throughout SuperCom’s 33-year history since its founding in 1988, it has been a trusted partner providing cutting-edge electronic and digital security solutions to dozens of governments worldwide. In recent years, we have become more aware of the immense challenges that nations around the world face in managing their offender populations. Now we leverage our technology expertise in government security and a wonderful team towards our current focus on the public safety sector. As part of our mission, we strive to revolutionize the public safety sector worldwide through proprietary electronic monitoring technology, data intelligence, and complementary services. Many governments face severe challenges in managing their offender populations. For instance, many countries suffer from high recidivism rates. In the U.S., within a few years of release, three out of four former prisoners are rearrested. Recidivism clogs the criminal justice system; without employment opportunities and basic necessities like housing, food, and clothing, behavior management and substance abuse control make successful reentry into society nearly impossible for former prisoners. Lowering recidivism rates, which indicate how often someone reoffends, benefits society by reducing crime rates and prison populations, saving taxpayer dollars, and ensuring that prisons can fulfill their purpose of reform and improvement. Additionally, prison overcrowding is a key factor affecting prison conditions worldwide. Prisons in over 118 countries exceed their maximum occupancy rates, with 11 national prison systems being more than double their capacity. This overcrowding is arguably the most significant problem faced by prison systems and can lead to life-threatening conditions. In 2020, the U.S. spent about $80 billion to operate prisons housing roughly 2.3 million people, meaning that 0.7% of the entire U.S. population is incarcerated at any given moment. Furthermore, nearly 1% of the U.S. population is behind bars. The societal cost of incarceration, including lost earnings, health impacts, and damage to families, is estimated to be up to three times the direct costs. Unfortunately, these issues are not unique to the U.S. but are prevalent globally. It is clear that prisons are not ideal for addressing these challenges. SuperCom provides top-notch solutions to effectively tackle these challenges using our technology and complementary services. Our pure security solutions provide an effective way for institutions to manage their offender populations while significantly reducing the associated costs of housing inmates. We provide house resolution with end-goal monitors and complementary technologies. The cost savings associated with our solutions are substantial. The total cost of monitoring an offender on home confinement or GPS electronic monitoring for both technology and services is approximately $10 to $35 a day, substantially lower than the $100 to $140 daily cost of each inmate in a correctional facility. Importantly, home confinement has proven to reduce recidivism, highlighting its effectiveness in helping offenders improve their lives. Additionally, our PureSecurity Electronic Monitoring Suite of products offers an efficient and effective way to enforce home confinement, alleviating overcrowded prisons. We see institutions increasingly evaluating home confinement alternatives to address these issues. There’s a global trend of governments turning to innovative solutions other than incarceration to ensure public safety; electronic monitoring is becoming more in demand and addresses most of the challenges we’ve mentioned. The electronic monitoring market was valued at about $1.1 billion in 2020 and is estimated to reach $1.6 billion by 2025. The U.S. and Europe account for about 95% of these markets today. With a strong reputation in both markets, SuperCom is well-positioned for continued growth and capitalizing on new opportunities. In Europe, we’ve recently seen a surge in RFP bid activity, with over $200 million in expected upcoming project bid opportunities in the next 18 months. At the same time, we continue to excel in 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 foothold in the European market. This win follows a consistent streak of victories in the European market, where we have displaced incumbent vendors time and time again, boasting over a 65% win rate in competitive RFPs in Europe. We’ve won the $7 million national electronic monitoring project with the Ministry of Justice in Sweden, as well as a $1 million project in the field of domestic violence with the Swedish voice. We also have national electronic monitoring projects in Denmark, Estonia, Finland, Bulgaria, and Latvia, to name a few in Europe. Recently, we announced a few contract wins and expansion into three more U.S. states: Texas, Idaho, and Wyoming. For the pure charge GPS tracking platform, we serve both adults and juveniles. Additionally, we announced that our fully-owned subsidiary, Leaders in Community Alternatives, or LCA, launched a new project with the probation department in Central Coast California to provide rehabilitative services. This project is valued at approximately $1 million over three years, or roughly $340,000 per year, and has already been launched. Our recent announcements of new contracts in Europe and the U.S. are exciting examples of the successful execution of our business plan in a vertical where we have a strong presence and an excellent reputation. Our success in securing these projects is attributed to a few main factors: our proprietary technology, developed in-house here in Israel, which scores highly in competitive RFPs, and our strong reputation as a premium provider of electronic monitoring technology and services. Our electronic monitoring technology supports various programs, including house arrest, GPS monitoring, rehabilitation services, and more, and has won over 40 new multi-year government projects since 2018. Over the past years, our strategic focus has been to transition away from our legacy business with one-time project revenues in Africa and South America, moving towards generating recurrent revenues in developed countries through our IoT tracking business. In 2021, we saw a gradual global recovery from the pandemic, leading to increased RFPs and procurement activity from potential government customers. In addition, we acquired an electronic monitoring criminal justice business in 2016, LCA, headquartered in Oakland, California. This acquisition provided us with a strong presence in the state since 1991, a large reference base, and relationships that have allowed us to enter the region with new technologies and capabilities. Our establishment in California positions us for growth into more locations and larger projects, where we've already won over $25 million worth of projects since this acquisition. We are establishing the company’s global sales division, having recruited a new VP of Sales and sales managers with industry experience, shifting from passive bidding to an active outreach sales strategy. The implications of this move are already reflected in our revenue, which has increased for the first time since 2017 on an annual year-over-year basis. Although the sales cycles in our business are long, it will take years to see the full effects of this change. The relationships with our customers can last for years, and the best we have made thus far have driven increased activity with existing customers and numerous new demos and evaluations with potential new customers. We operate in a small niche market where our customers are familiar with each other, and having a solid reputation is essential when selecting a vendor. The new wins, combined with an improved sales team and the first steps toward executing the U.S. market expansion strategy, are all contributing to our success. We also consider potential strategic acquisitions of our resellers as part of our growth plan. Our strategy has been to build outstanding technology, expand our presence, and deliver exceptional services. Each customer won and project deployed further strengthens our reputation, making us even more competitive. In the past year, we have made progress on each of these elements, achieving recognition through awards from existing and new customers in various regions. Our strategy has always been to lead with technology, and this year we continue investing in research and development to ensure our products remain market leaders. Our reputation in the industry regarding IoT solutions continues to be stellar due to these investments, evidence that our efforts are paying off. With these product investments, we will introduce new features and technologies into our proprietary platform, extending our lead in the marketplace. Our R&D teams continue to innovate and disrupt, whether through new biometric features, battery life, communication capabilities, or entirely new solutions for addressing domestic violence, alcohol monitoring, and smartphone electronic monitoring within dense, hard-to-monitor urban areas and subways. We believe there are opportunities to further enhance our growth through strategic acquisitions of local support providers with strong reputations and customer bases in local communities, many of whom we know through prior deals. An example of this strategy is reflected through our $3 million acquisition of LCA in 2016, which also brought strategic value and new projects to our network. At this time, let’s move over to the financial discussion. As mentioned in the previous earnings call, the company has invested in its financial reporting resources and has returned to quarterly and timely reporting last year. We are pleased to host our annual earnings call in March for the first time in 10 years. We have strengthened our balance sheet. Throughout 2021, the company secured aggregate proceeds of $12 million through multiple notes of subordinate debt. In March 2022, the company raised $4.65 million in a registered direct offering with a specific accredited institutional investor, providing us additional liquidity to execute our business plan. Additionally, our financials include PPP and ERTC incentives within the Coronavirus Aid, Relief, and Economic Security Act, encouraging employers to retain their workforce during the COVID-19 crisis. Our revenue grew 4% for the full year of 2021, the first increase since 2017. This growth represents our continued shift from the legacy identification business to the public safety business. For the first time, our IoT division grew faster than the decrease in the legacy business, leading to total annual revenue growth. EBITDA in 2021 decreased to $2.1 million compared to $2.8 million in 2020. We lost a maintenance contract with an African client at the end of Q2 2021, which previously accounted for around $300,000 in revenues quarterly, negatively impacting revenue growth in the third quarter. Nonetheless, we experienced 4% total revenue growth offset by new projects in Europe and the U.S. In 2021, we focused on cost improvements due to the uncertainty related to the pandemic. Our gross margins improved to 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 completion of maintenance contracts in Africa. Fee and maintenance-related revenues were previously a high-margin business but have been replaced with multiple other projects with lower margins, particularly in their earlier stages, including many initial deployment costs. We increased our research and development spending by $400,000, from 20% to 23% of revenue. Sales and marketing expenses declined by $30,000 in 2021, while general and administrative expenses increased by $80,000. Our cash restriction and cash balance at the end of 2020 were $4.6 million. The company also incurred one-time expenses of roughly $4.4 million, mainly driven by reorganization costs related to the legacy business and an allowance of doubtful debts amounting to $3 million. The company reported an operating loss of $6.7 million, compared to an operating loss of $3.7 million in 2020, primarily due to these one-time expenses. As economies begin to recover, we will continue to invest in our sales and marketing efforts to drive revenue growth. With that, I’ll turn the call over to the operator to open the line for questions.

One moment please for the first question. There are no questions in the queue at this time. Your question is coming from Michael Summerton. Your line is live.

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

Yes. Thanks for the question. We are very excited. As previously mentioned, we have a long stream of new national contracts in Europe, including Sweden, Denmark, the Czech Republic, Bulgaria, and Latvia. Some of these countries are starting out with electronic monitoring, such as Croatia, which is their first full-scale nationwide EM contract. We competed against a few other vendors with a presence in Europe, and we scored the highest to win the project. We received the award last week, and we will provide follow-up announcements on project launch and final contract signing when they occur.

Thank you very much.

You’re welcome.

Thank you. Your next question is coming from an unidentified caller from Sabre Capital. Your line is live.

Thank you. Hey, Ordan. Just a quick question on the Finland contract; I don’t think we’ve seen that go live yet. Is that correct? If not, what’s been the delay, and should we expect similar delays regarding Croatia?

Yes. Good question. We don’t expect similar delays with Croatia. Sometimes when we receive awards, there’s an appeal process where competitors have the right to appeal, which can delay the process, as we’ve seen in Finland. However, we feel confident that we will continue to launch the projects in both Finland and Croatia and will provide updates accordingly, just as we have with Sweden and other projects that we announced. First, we announce the award, and then we announce the official project launch.

And just for housekeeping, do you have the revenue figures related to e-Gov for the year-end and cybersecurity? Do you have that offhand?

Let me look. One moment, please. Okay, I have some figures here. You’ll see this soon in our annual filing, which we hope to finish and put out soon. Essentially, e-Gov revenues declined from $1.9 million to $1.7 million, while cybersecurity revenues dropped from $2.2 million to $1.6 million. In contrast, our IoT revenues increased from $7.6 million to $8.9 million.

Okay, thanks.

These are still unaudited numbers. Our audited numbers will be included in our 20F filings, which we expect to complete soon.

Okay. Thank you.

Welcome.

Thank you. Your next question is from Dylan Gallagher. Dylan, please go ahead.

In a PR on March 9th, you announced plans to release a new version of a robust and scalable cybersecurity software technology with enhanced protection from cyber attacks. Do you have any updates on when you plan to release that? Also, do you have any revenue projections for 2022 overall?

Thank you, Dylan. First, we do not currently provide guidance or revenue projections. We are transitioning from our legacy business to our new business, which saw growth for the first time this year, and we’re still setting things in place. However, we do expect more project wins and to continue deploying as we feed into our business plan. Regarding the cybersecurity solution, we have nearly 15 years of experience with our software and cyber consultancy practice. Recently, there has been heightened demand from enterprises around the world to secure themselves from various threats. We are releasing a new version that is more secure and customized to current threats. While we don't have an exact timeline, it should be later in 2022. Meanwhile, our existing solutions and software continue to provide excellent support against current and past threats, and we are happy to assist our potential existing and new customers around the world with their cybersecurity needs, given our extensive experience and expertise in this area.

Okay. Thank you.

Thank you. 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 in our next conference call, filings, and press releases. Thank you very much, and have a good rest of the 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.