SuperCom Ltd Q3 FY2024 Earnings Call

Ladies and gentlemen, good morning, and welcome to SuperCom's Third Quarter 2024 Financial Results and Corporate Update Conference Call. This call is also being recorded for playback purposes. Joining me today is Ordan Trabelsi, SuperCom's President and Chief Executive Officer. I want to remind you that during this call, SuperCom management may provide forward-looking statements regarding the company's expectations for future performance or operational results. These statements involve risks, uncertainties, and other factors that may cause actual results to differ significantly from what is projected. For more information about these risks and uncertainties, please refer to the risk factors outlined in SuperCom's most recent periodic reports and the accompanying press release, particularly the cautionary statements included. Today's conference call will include EBITDA, a non-GAAP financial measure that SuperCom believes is helpful for evaluating its performance. You should not rely solely on this additional information as a replacement for GAAP results. For a reconciliation of this non-GAAP financial measure to net loss, which is a comparable GAAP figure, please see the reconciliation table in SuperCom's earnings press release. You can also find reconciliations for other non-GAAP and comparable GAAP measures there. The information shared in this call is time-sensitive and accurate only as of today, November 14, 2024. Unless required by law, SuperCom does not intend to publicly update or revise any information to reflect events or circumstances occurring after this call. Now, I am pleased to turn the call over to SuperCom's President and CEO, Ordan Trabelsi.

Thank you, operator. Good morning, everyone. Thank you for joining us today. Earlier this morning, we issued a press release of our financial results for the third quarter and 9 months ended September 30, 2024. You can find a copy in the Investor Relations section of our website at www.supercom.com. Today, I'll start my comments with a brief update on our recent business highlights, strategy and future results, followed by a Q&A session. The third quarter was another quarter of significant achievements for SuperCom, showcasing the continued strength and resilience in our business. Our financial results for the third quarter and first 9 months of 2024 reflect the successful execution of our strategic initiatives, which have been driving revenue growth, improving profitability and enhancing cash flows. Year-to-date, revenue increased to $21.3 million. Gross profit surged by 35% to $10.7 million, and our gross profit margin improved dramatically to 50.1% from 30.7% in the prior year period. Additionally, our free cash flow increased to positive $1.2 million from a negative number in Q3 of last year. We are pleased with our results and we look forward to the following quarters. This quarter was particularly exciting to solidify our leadership position with key contract wins, including the prestigious National Israeli electronic monitoring project, and we also expanded into new regions, including New York, West Virginia and Maryland, further strengthening our footprint in the U.S. market. These wins not only reflect the exceptional value of our technology but also help position us for sustained expansion in the years ahead. Our commitment to financial development, operational efficiencies and technology innovation has led to tangible results. An improvement in net income to $2.52 million this month compared to a net loss of $2.48 million in the prior year period. Free cash flow generation of $1.2 million this quarter and a cash balance of $6.2 million underscore the tangible results along with our ability to support further potential growth opportunities. We are also particularly proud to have continued our successful integration of the Pier 1 solution into multiple new markets during the period, reflecting our continued commitment to innovation and our ability to meet the evolving needs of time. This, along with our strategic initiatives, has positioned us to achieve sustained profitability and expansion. For those new to SuperCom, our mission is to revolutionize the public safety sector worldwide with our proprietary electronic monitoring technology, our data intelligence, and suite of complementary services. With over 36 years of experience since our founding in 1988, we've been a trusted partner for dozens of national governments worldwide, providing cutting-edge electronic and digital security solutions. Our strategy is straightforward and powerful. We deal with innovative technology. Our proprietary electronic technology has scored highly competitive government tenders for various programs that come to us, including GPS monitoring, rehabilitation services, and domestic violence prevention. Moreover, we have recently expanded our portfolio to include advanced AI-driven analytics, which are integrated into our electronic monitoring system. This addition enhances our ability to provide predictive insights and improve outcomes for our core services. Since 2018, we've secured over 50 new multiyear projects with this solution. We continue to expand our global presence, and our growing reputation as a premium provider of electronic monitoring solutions and services enhances our market position with each new customer win. We deliver outstanding services with a strategic focus on the IoT tracking business in developed markets, which is where we see opportunity. The electronic monitoring market is projected to reach $2.3 billion by 2028, with the U.S. and Europe constituting about 95% of the global market. We continue to amplify our technological leadership with significant R&D investments, leading to the launch of various solutions like PureProtect and PureOne. These offerings are already making headway in various U.S. markets and are pivotal for SuperCom's expansion. PureProtect is a life-saving domestic violence monitoring solution, providing protective measures to families suffering from domestic violence or stalking, thereby increasing their safety. We offer a unique, lightweight solution with long-term battery life, which no other provider offers for domestic violence protection in such a unique way. This is spreading rapidly around the world with more wins in different regions. PureOne is an all-in-one GPS tracking and price monitoring solution, creating comprehensive capabilities into a single device. Similar to many of our products, it offers top-line features that set it above the competition in most metrics, and this product is key for our expansion in the U.S. Our IoT-based offerings have been particularly effective in monitoring offenders and managing real-time information. This real-time advantage is a game-changer, providing authorities with actionable insights timely to mitigate potential risks and enhance offender safety. These products have significantly expanded the company's trust in the market. We were very pleased with the reception, traction, and acceptance of our solutions as we work to facilitate accelerated expansion of SuperCom into U.S. and European markets. We fortified our operational infrastructure to support our growth and revamped our sales strategy with a proactive outreach approach. Our sales team, with deep industry expertise, has been instrumental in achieving new wins and driving growth. Last month, we announced that, together with our prime partner, Electra in Israel, we have been awarded a 5-year contract by the Israeli Prison Service Agency to deploy our PureSecurity electronic monitoring solutions. This nationwide program is expected to cover all electronic monitoring programs in the country with an estimated 1,500 enrollees simultaneously and potential for expansion. SuperCom will deploy cutting-edge electronic monitoring solutions, including PureCom, PureTrack, PureTag and PureBeacon. The 5-year contract is already in effect and includes the option for a 1-year extension, potentially totalling a 9-year contract term. The project is won through a highly competitive process, including several rounds of negotiations, demonstrations, and system evaluations required and supervised by the IPS. We displaced the incumbent that has held the contracts for many years, and this win solidifies our commitment to excellence, technological leadership, and strong partnerships. Our comprehensive set of offerings positions us well to win multifaceted national projects, such as this one, set to encompass all electronic monitoring programs within the country. We have secured significant new contracts through a competitor tender process. Besides winning new projects, we continue to execute and receive ongoing orders from our existing partners, totaling over $2.9 million in European government contracts, reaching over $13.5 million in orders during the past period. We have secured a new national program related to domestic violence long-term solutions. The deployment of our PureSecurity suite consisting of PureProtect, PureTrack, PureTag, and PureMonitor demonstrates the versatility and effectiveness of our solutions and underscores our leadership in the electronic monitoring space. Collaborations like this exemplify the confidence that clients have in SuperCom and our experience in the market offers opportunities to broaden our engagement with our diverse, patented solutions. Notably, at the end of 2022, the company won the largest national electronic monitoring project in Romania, valued at over $33 million, involving up to 15,000 monitored offenders simultaneously per month for a period of 6 years. The project has progressed significantly and demonstrated substantial advancements, further establishing our location in the country's national electronic monitoring project. The scope of the project reinforces the strength of our superior security suite and cements our position as a trusted partner for governments worldwide. We've also launched domestic monitoring solutions in various European regions and are working to introduce these as well in the U.S. While the European market continues to grow, the U.S. market offers a larger opportunity, being approximately 3 to 5 times the size of the European market for electronic monitoring. With the introduction of our PureOne electronic monitoring product now available in the U.S. and the expansion of our domestic violence monitoring solution, we believe SuperCom is well-positioned to unlock substantial growth potential in this untapped market. Although SuperCom already operates in multiple U.S. states, we are actively focused on further expanding our products in the U.S. Our wholly-owned subsidiary, LTA, located in California, is expanding through existing program scopes, winning rebids with existing customers, and securing new programs with brand-new clients. The company strategically prioritizes the expansion of PureOne into new markets and geographies. PureOne has already received high praise during its rollout across various cities in the U.S., where it has been successfully deployed and used to monitor offenders. Moreover, sales activities for PureOne have commenced in parts of markets outside Europe and North America. Despite our long-standing presence in parts of California, the U.S. market remains largely untapped for us. Since we began investing in outbound sales efforts in 2022, we've captured wins in California, Idaho, Texas, and Wyoming, to name a few. This quarter, we announced a few more wins, reiterating the launch of PureOne in 2023 with top positive feedback. This positions us to accelerate market capture across the U.S., unlocking significant growth opportunities. Our strategic sales team and new wins have laid the groundwork for the company's U.S. market expansion strategy and driven an increase in our pipeline. The launch of our PureOne solution in the U.S. market marks a significant milestone in our expansion efforts. Since our last earnings call, we've announced multiple new projects in North America. SuperCom has secured multiple new contracts with regional agencies across West Virginia, which leverage our innovative solutions incorporating technological advances. These contracts are generating recurring revenue, further solidifying our presence in the U.S. market. We've also secured new contracts with a leading Baltimore-based service provider in Maryland. These contracts launched in June 2024 and are generating an annual recurring revenue of approximately $250,000. Additionally, we secured our first contract in New York State through a competitive selection process, further strengthening our strategic expansion across the U.S. market. As I mentioned earlier, the introduction of PureOne was a game-changer and signifies our commitment to delivering innovative, superior technology solutions. These contracts reinforce our position as a market leader in various fields, and we view these recent wins as indicators of our growing influence and expansion potential in North America and worldwide. In conclusion, despite economic uncertainties and ongoing global challenges, including those in Israel, SuperCom's solutions are becoming increasingly relevant. We continue to see growth driven by escalating costs and a surge in the adoption of protective monitoring solutions worldwide. The company's PureSecurity Technology provides an effective way for institutions to enforce home confinement at lower costs. Monitoring compliance via home confinement or GPS can cost about $10 to $35 a day—90% less than $100 to $400 per day at a correctional facility. Moreover, home confinement helps enhance offenders' reintegration into society and improves their lives and communities. As discussed in previous calls, we are leveraging opportunities to grow in the U.S. through strategic acquisitions of local electronic monitoring service providers with a strong customer base in local markets. We constantly monitor market potential acquisitions that could generate significant value at competitive prices by immediately expanding our presence and providing integration synergies. Our acquisition of LCA in 2016 has significantly increased our strategic value, allowing us to win over $35 million in new projects in California alone. I'll now turn briefly to the financials. During this quarter of Q3 and the first 9 months of 2024 compared to the same period last year, note that our multiyear projects do not strictly adhere to a quarterly scale and can fluctuate. For 9-month performance, revenue for the first 9 months increased to $21.3 million, up from $20.9 million in the same period last year. Gross profit surged by 35% to $10.7 million with a gross margin of 51%, up from 37% last year. Net income improved significantly to $2.52 million, compared to a net loss of $2.4 million in the prior year. Non-GAAP net income included $4.8 million in net contributions, with EPS reaching $1.6 and non-GAAP EPS reaching 3.1%. Monthly performance in Q3 showed revenue increased to $6.91 million, up from $6.78 million in Q2 of last year, driven by new wins and expansions of existing contracts. Gross profit this quarter was $3.2 million, reflecting a margin of 46% compared to $4 million and a margin of 59% in Q3 of last year. This margin decrease was primarily due to project mix and timing. EBITDA totaled $1.1 million compared to $2.5 million in Q3 of last year, also primarily due to project mix and timing. Positive free cash flow of $1.2 million in Q3 of this year further underscores the discipline we're applying compared to negative free cash flows in the same period last year. Of note, our cash flow from operations for the first 9 months of the year has turned positive, a remarkable improvement from recent years. If we look back, in 2021 we had negative $9.7 million in operating cash flows, $4.7 million in 2022, and $2.4 million in 2023. Now, in the first 9 months of 2024, we have positive operating cash flows. These are great results and indicative of the positive trend we want to see supporting our strategic plan and tapping into the success we're achieving. This quarter's results highlight our ability to harness the high-margin potential of our project portfolio through successful execution across various stages of these projects, showcasing our focus on sustained growth and profitability. Typically, initial project stages incur higher expenses, while advanced stages yield higher gross margins, which can cause fluctuations in our gross profit depending on project competition and deployment stages. We are running multiple projects across different stages throughout the world, which can lead to fluctuations in quarters depending on how each project falls into a specific quarter. As our project pipeline matures, we expect an upward trend in gross margin based on the evolved project portfolio. Our operating expenses in the quarter stayed in line with the first half of the year as we continue with our existing strategy. It's also notable that we've made considerable strides in reducing our long-term liabilities to $4.5 million year-over-year. Our operating cash flows improved to $1.2 million year-over-year, and our cash position grew to $6.2 million at the end of the quarter, marking our highest reported cash position in recent years. We remain focused on reducing our need for external funding as we continue to win and execute projects. These improvements further strengthen our financial foundation to support ongoing growth initiatives and strategic investments. In closing, I'd like to thank our global team for their tireless work to achieve this record-setting performance. We have developed the right technology and products to help clients in the criminal justice system overcome challenges and make better use of the over $80 billion spent annually in the U.S. on operating rehabilitation centers. There’s approximately a 75% incidence of recidivism in the U.S., indicating substantial room for improvement when it comes to tech adaptation for these programs. We're excited about our growth and about the increasing demand for our products. After several years of transitioning from our legacy business to a focus on IoT tracking solutions, we're pleased to share a positive shift reflected in growth in both revenue and profit. We believe we are well-positioned to continue expanding and capitalizing on many opportunities. These are being driven by multiple factors, including our strong reputation in the U.S. and European markets, the counter-cyclical nature of the electronic monitoring industry, the public policy shift towards monitoring as opposed to incarceration, and the growing adoption of domestic violence prevention solutions. We anticipate continued expansion in the U.S., Europe, and potentially other regions. Our commitment to maintaining our technological advantage and a strong growth foundation remains steadfast as we continue to invest in these areas. With that, I'll turn the call back to the operator for questions.

Your first question is from Matthew Galinko from Maxim Group.

Can you maybe start off by just touching on what the pipeline looks like for Europe in 2025? Are there any large national projects that are up for bid or that you're pursuing now that you think could close in 2025? Or what is your outlook like as you look out over the next year?

Thanks, Matthew. Good question. As you may recall, when we entered the market several years ago, we started with smaller projects in Europe, like ASEE, which were around $100,000, and grew to larger ones. Denmark has a $7 million project and now remains with a $33 million project. Those are all access references and a proven track record that help us compete effectively in the European market at this stage. We are continuously monitoring, bidding, and progressing for various projects across nearly every Western European country, many of which have national programs, while there are still many countries where we haven't yet established a presence. We are aware of numerous opportunities of various sizes out there, many of which are even larger than our project in Romania. European markets, while smaller than the U.S. market, still represent a great opportunity for us. Our regulatory position is strong, and we intend to continue our efforts parallel to our entry into the U.S. market.

Got it. And when you're bringing on new projects in Europe, is it usually to displace or replace legacy systems? Are they generally looking for additional functionality, such as domestic violence monitoring? What are the new bids typically requiring?

The national programs frequently encompass all the tracking and monitoring services like house arrest, GPS tracking, domestic violence, and alcohol monitoring. There is often an incumbent company, as electronic monitoring has been around for a long time. However, there are regions, such as Romania, where we established the first program since they did not have electronic monitoring previously. In countries like Croatia, we launched their programs. Transitioning to a new vendor requires capital investment and considerable effort; the country must see significant value in the new system to switch from the old vendor. This means we need to offer substantial improvements over what they currently experience. We are not only ensuring improved tracking services but are also introducing capabilities such as domestic violence monitoring and our PureProtect program. It's a blend of enhancing existing programs and implementing new ones. Partnerships with local entities help us provide top-tier support and effective delivery on timelines, which are crucial aspects for government contractors.

Got it. And then last question for me, and then I'll jump back in the queue. I guess, with respect to the U.S. market, it seems like you're expanding your footprint into new states. Do you expect to need to add resources to that effort to accelerate growth in North America? Or do you plan to add more direct personnel to push that faster? I'm curious how you think about pursuing the larger opportunity in the U.S.

You're asking if we will add more personnel on the ground to accelerate our efforts, right?

Yes, exactly.

Good question. There’s a trade-off in the U.S. market; changes happen much faster than in Europe since you're looking more at county and regional agencies rather than going through the lengthy RFP process. Resellers control multiple counties, running their electronic monitoring systems. If they want new technology, they can switch quickly, typically within 2 to 3 months. On the other hand, more ground personnel are needed because the U.S. market is more fragmented. Instead of just looking out for a national project, we have thousands, even hundreds of ongoing projects across the country. While there are some aggregators in this market, we prioritize managing our cash use and maintaining profitability. We have seen significant growth efficiently with our existing resources. Accelerating growth is possible with more personnel but requires a careful balance that we are managing as we continue to optimize our growth.

Great. I appreciate all the answers, and I'll be back if there are no other questions in the queue. Thank you.

Your next question is coming from Dan Shades.

Ordan, first of all, it sounds like another great quarter of execution. We really appreciate that. I have a couple of questions. First one would be about the debt-to-equity conversion. How many new shares were issued, and at what price?

I don't have the exact figures for the conversions this year. We've completed several conversions, usually at a premium, up to 100%. This has helped us reduce our long-term liabilities by $4.5 million. It benefits shareholders since we reduce debt while obtaining a significant premium for stocks.

So how many new shares were issued as part of this conversion this particular quarter?

This quarter, nothing was issued. It's just an update; we provide annual updates compared to last year to show the reduction in long-term liabilities that resulted from conversions performed in previous quarters.

Okay. Wonderful. That's excellent to hear. How many shares are outstanding at the end of the third quarter?

We reported that there were roughly 2 million outstanding shares at that time, plus a little more for various adjustments.

Okay. Wonderful. I'm thrilled to hear that there wasn't any additional dilution for long-term shareholders. I believe in your product and your mission, but it's disheartening to see the continual dilutions over the last couple of years. I hope that's behind us. The market will react positively once that becomes common knowledge.

I understand. We have been working to grow our infrastructure while reducing cash usage. We faced negative cash flows of $9.7 million, $4.7 million, and $2.4 million in the prior years, but now have positive free cash flows. We are also trying to be conscious of project stages, utilizing cash effectively while aiming for optimal shareholder value.

Your next question is coming from Matthew Galinko from Maxim Group.

Can we expand a little bit more on the deal you have now in Israel, particularly maybe a little bit more about the structure? Is it more of a purchase or a recurring structure? What are the opportunities for expanding that project over time?

Good question, and I'll organize the information for you. At a high level, this project involved working with an incumbent that had been running the program for many years. We partnered with Electra and won a bid for the initial period of 5 years, with the option for four 1-year extensions, totaling potentially 9 years. If we perform well, it could extend even further. The program starts with house arrests, covering 1,500 enrollees, and follows a leasing model that is common in the U.S. and some parts of Europe. We plan to introduce additional programs as the government plans to implement more monitoring solutions to complement existing criminal justice initiatives.

Got it. If you add incremental units beyond the initial 1,500, what would the margins look like? Is there a benefit to doing so?

There's a significant cost associated with setup for new customers, including installation, hardware, training and software development. Those costs apply to the initial rollout; however, adding new units generally has much higher margins, potentially 30% higher because they don't require the same degree of customization. This means that the profit margin improves significantly as units are added to the contract. Projects are standardized which further helps to ensure profitability.

Is there a target for the number of trackers in the Israeli market over the initial 5 years? Could the count go from 1,500 to maybe 3,000? Or is this something that’s impossible to predict at this stage?

Given the population of Israel, which is approximately 10 million, and knowing there are broader regional populations, transitioning to a system like this has significant growth potential. Romania started with projections for 50,000 units, and they continue to expand that as numbers grow. The potential for the Israeli project is certainly much greater than 1,500, and we've seen technologies accepted and integrated efficiently throughout various government processes.

For the initial 1,500, will they become active as soon as the launch happens, or is there a ramp-up period for full deployment?

We've already started deploying the project; it takes time to get everything in place, so the initial rollout is supposed to be done within about 6 months. The initial number will be less than 1,500; likely somewhere between 1,000 and 1,500 at first. The swap process is relatively smooth in Israel due to its smaller geographic area, allowing us to work efficiently and successfully implement the necessary systems.

At this time, I will pass the call back to Ordan for closing remarks.

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