SuperCom Ltd Q2 FY2023 Earnings Call

Ladies and gentlemen, good morning, and welcome to SuperCom's Second Quarter of 2023 Financial Results and Corporate Update Conference Call. 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 is 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 a 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 on 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 141% year-over-year revenue increase, reaching a five-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, our mission is to revolutionize public safety worldwide through proprietary electronic monitoring technology, data intelligence, and complementary services. For over 35 years of experience since our founding in 1988, we've been a trusted partner to numerous 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 proven successful, driven by the following key factors. First, our proprietary electronic monitoring technology scores highly in competitive government tenders and supports various programs such as house arrest, GPS monitoring, rehabilitation services, domestic violence prevention, and more. In 2018, SuperCom secured over 50 new multiyear governmental projects with project wins valued at over $40 million in 2022 alone. Second, our strong application 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's strategic focus and attention to our IoT tracking business in developed countries with the opportunities to create it. 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 constitute 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 continued to invest in R&D to ensure our products remain the most competitive on the market, continuously introducing new features and technology on our proprietary platforms. These efforts led to the successful development and deployment of two 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 rigorous testing and has been successfully implemented in multiple projects, including Romania's $32 million EM project. The second is PureOne, an all-in-one state-of-the-art GPS tracking ankle bracelet monitoring solution that integrates comprehensive monitoring capabilities into a single device. With a 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. It supports SuperCom's growth as we not only maintain our technological advantage but also invest in enhancing our operational infrastructure. Furthermore, we bolstered the company's global sales efforts by recruiting a new sales team with industry veterans, shifting from passive bidding to an active outreach strategy. Throughout the past 12 months, we announced many new project wins in the U.S. and Europe. SuperCom has continuously displaced incumbent vendors with an over 65% win rate in European competitive tenders. These achievements are particularly notable given the economic uncertainty and market volatility caused by potential recession and unstable geopolitics. However, SuperCom is a good candidate to be a recession-resistant company due to 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. spent over $80 billion to keep approximately 2.3 million people in prison, which equates to nearly 0.5% of the entire U.S. population. For these reasons, among others, we see a growing global trend of governments turning to innovative solutions and alternatives to incarceration for public safety. The company's pure security technology suite has been designed to address this trend, offering an effective way for institutions to enforce home confinement, reduce prison overcrowding, and lower costs significantly. For example, the total daily costs for monitoring an offender on home confinement with 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. Additionally, we have witnessed a surge in the adoption of victim protection solutions worldwide, which aligns perfectly with our strategic plan and the long-term new product solutions like Pure Protect. In the European market, SuperCom expanded its business into over 10 countries and secured significant new projects, typically awarded through competitive tender processes. SuperCom lost a $3.6 million national EM project in Finland with the national government in Q1 2023. By May 2023, the PureSecurity 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 for a national electronic monitoring project in Romania. The first electronic monitoring program in Romania is valued at $33 million, which includes up to 15,000 monitored offenders per month for up to six years. We've also launched our domestic violence solutions in the European regions and plan to launch them in the U.S. as well. In Israel, there is high potential for a new domestic violence program as the government has just passed 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 prioritizes the expansion of PureOne into new markets and geographies. It has already received high praise during its introduction in various regions in the U.S., where PureOne has been successfully deployed and is actively utilized to monitor live offenders today. Moreover, sales activities in Q1 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 evaluations of potential new ones. As we discussed before, we believe there are also opportunities to enhance our U.S. growth through strategic acquisitions of local electronic monitoring service providers with strong reputations and customers 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. This successful acquisition has proven to be a great value through over $30 million of new project wins generated in California since the acquisition alone and improvements to operational margins with operational efficiencies and the 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%. We managed a five-year record revenue of $7.7 million in the second quarter, marking the first consecutive quarter of high year-over-year revenue growth. Moreover, our Twelve-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 market prefers our solution over alternatives. Furthermore, we are proud to sustain positive EBITDA in each of the last three years, from 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 the later stages yielded higher gross margins. 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 one-time 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 $650,000 versus an operating loss of $1.75 million in the previous year's 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 a $0.7 million loss in the previous period, reflecting the benefit of operating leverage associated with higher revenues, deploying new IoT projects, and a continued shift away from the legacy business all underscoring 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 prior year's period. 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 prior year's 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. As these large projects start, there is 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 one-time expenses of $230,000, mainly pertaining to the legacy business. In closing, we are excited about the growth we're experiencing and about the growing demand for our products. After five years through which we transitioned from our legacy business to the IoT tracking of offenders business, we finally see the shift to rapid revenue growth and believe that we're well positioned to capitalize on the many new opportunities arising for us. These are driven by multiple factors, including our strong presence and reputation in the U.S. and European markets, the countercyclical nature of the electronic monitoring industry, a growing public policy shift towards monitoring and alternatives to 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 the operator to open the call for questions.

Your first question is coming from Matthew Galinko of Maxim Group. Matthew, your line is live.

Thanks, taking my questions. 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 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 with the PureOne solution and the PureProtect solution, which works through the smartphone. In the U.S. market, historically, a lot of the judges like an all-in-one solution, and we created a brand-new PureOne solution which is all-in-one. It has the longest battery life, has a mobile charger, is lightweight, and we believe it has the best tracking accuracy in buildings and underground, 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 have seen very, very good responses and feedback. It's actually running on live offenders in various places in the U.S. We haven't done a massive launch yet; it is still small launches in various locations in the U.S. So far, it's working great, and the feedback is excellent. We expect that this will be a very strong market driver for growth in the U.S. and other regions of the world where we're looking to use our PureOne solution.

Got it. That's helpful context. Can you help us understand maybe the structure, maybe 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 two buckets of classical revenue and opportunities over the next year, two years?

Good question. So, we had, in Europe, over a $200 million pipeline of opportunities. In the U.S. market, we haven't identified some of the larger opportunities because some of them had restraining factors such as the requirement for an all-in-one solution. Now our suite, our PureSecurity suite has the PureTrack, which is a two-piece solution, a smartphone with the bracelet that handles domestic violence cases, has alcohol monitoring, and now with PureOne, we have finally addressed that last piece that we were missing for many potential opportunities. So right now, we're evaluating these opportunities, whether it's the government tenders or resellers who want to try the technology in the U.S. and in other areas around the world. Our pipeline of opportunities can grow significantly. We just started deploying it into the U.S. in July. It's brand new, it's working great, but we'll see during the quarters and years ahead how this release starts to propel our business going forward and complements what we're already doing with our 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. Our team, we have a common form of commission structure and on-target quotas for the salespeople. If they surpass their quarters, they get acceleration; if they don't meet the quotas, there's a decrease in their commission. Beyond that, we also work with resellers who sell for us. For example, LCA sells to many counties in California and aggregates all of them together into one. There are many other providers like that around the U.S. that do the same thing. They, of course, care about stability and good products and also technological advances. They have the ability to switch over if they have 1,000 clients that they're monitoring on GPS. They can switch them over almost immediately to new technology and are continuously evaluating the best technology out there, which is where we provide value. With the PureOne, we've received very good feedback, allowing them to quickly transition. As they deploy 10 units, 50 units, or 100 units, and it works great, they can scale up their deployments.

Alright, I'm sorry, what? One more question.

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

It was really about the commission for sales, but my final question is regarding your resellers evaluating PureOne. How long do you expect the evaluation period to last before they start making decisions to deploy PureOne?

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 they've ever seen, they like the mobile charger and the design. People are very, very excited about it. Still, there is caution. They want to make sure that things are working and are stable. They don't want to overnight put 1,000 new offenders on it. But just like in the European market, we started with small projects and now are closing projects worth millions. As they see more states and counties adopting the same technology, they share experiences, and word spreads. This could lead to significant increases in adoption rates. In the U.S., the growth can move faster because instead of waiting for national tenders, resellers can act quickly. We expect growth in the U.S. to accelerate because we're already an accepted vendor, well-known in the industry. Whether it's in one quarter or four quarters, we don’t know yet, but we believe the results will be positive.

Thank you very much. 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?

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.