Earnings Call Transcript - SPCB Q3 2023

Operator, Operator

Ladies and gentlemen, good morning. And welcome to SuperCom’s Third Quarter of 2023 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 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’s 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 the risks, uncertainties and factors, 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 the 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, November 14, 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.

Ordan Trabelsi, President and CEO

Thank you, Operator. Good morning, everyone, and thanks for joining us today. Earlier this morning, we issued a press release with our financial results for the third quarter of 2023, which you can find in the Investor Relations section of our website at supercom.com. On this call, we will briefly discuss our business highlights, our growth strategy and the results for the quarter before moving into a Q&A session. Today, I am excited to share with you SuperCom’s outstanding performance for Q3, which reflects the tremendous strides we have made in our operations and financial position. The third quarter of 2023 was a landmark period for us where we achieved an incredible 550% growth in EBITDA, reaching $2.7 million for the quarter and a five-year record net profit. We are proud to report non-GAAP EPS of positive $0.24 for the third quarter of 2023 as well. I want to take a moment to remind everyone that, not too long ago, in the year of 2020, after years of continuous decline in the business, we reached a low of annual revenues of less than $12 million and net losses of nearly $8 million. Since then, we worked very hard to turn things around and annualizing our Q3 2023 numbers, you will reach a current annualized run rate of $27 million in revenues and EBITDA of $10.8 million. Our annualized EBITDA today is close to our annual revenues for 2020. These, of course, are meaningful achievements that we are proud of and I’d like to thank our wonderful global team at SuperCom for their hard work and dedication to making this all possible. These financial metrics not only underline our strong execution, but also the increasing efficiency and scalability of our operations. During the past year, we won several important contracts in the U.S. and Europe and we are excited about the opportunities we see ahead. I will go into more details in a few moments. But for those who are new to SuperCom, our mission is to revolutionize the public safety sector across the globe with proprietary electronic monitoring technology, data intelligence and a suite of complementary services. With over 35 years of experience since our founding in 1988, we have been a trusted partner to dozens of national governments worldwide, providing cutting-edge electronic and digital security solutions. Our strategic blueprint is straightforward yet powerful, leading with innovative technology, developing superior solutions, expanding our global presence and delivering outstanding service. The strategy is backed by our proprietary electronic monitoring technology, which scores highly in competitive government tenders and supports various programs such as house arrest, GPS monitoring, rehabilitation services, domestic violence prevention and more, and since 2018, SuperCom has secured over 50 new multiyear government projects with project wins valued at over $40 million in 2022 alone. Our strong growing reputation as a premium provider of electronic monitoring solutions and services, with each new customer win enhancing our market position. And lastly, our strategic focus on the IoT tracking business in the developed market for the opportunities created. With the electronic monitoring market projected to reach $2.1 billion in 2026, the U.S. and Europe constitute about 95% of these markets. These successes and opportunities have resulted in a growing business pipeline with strong recurring revenues at a level of over 70% of total revenues in 2022, for example. In Q3 of 2023, we continued to amplify our technological leadership with significant R&D investment, leading to the launch of advanced solutions like PureProtect and PureOne. These offerings are already making headway into various markets, including the U.S. and our pivotal expansion in SuperCom. PureProtect is a life-saving domestic violence monitoring solution. This solution offers strong protection to families suffering from domestic violence. 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 $33 million EM project, the first electronic monitoring project in their nation. In Romania, the police placed our devices on those who have harmed family members, and if they come in close proximity to them, an alert is sent to the police immediately and to the victim’s family. This offers a new layer of protection that has not existed before. Another product we launched recently is PureOne. It’s an all-in-one GPS tracking ankle monitoring solution that integrates comprehensive monitoring capabilities into a single device. Like many of our products, it outperforms the competition on those metrics. This product also expands the company’s addressable market. We have been very pleased with the early reception and traction of our newest solutions and expect them to help facilitate our expansion of SuperCom in the U.S. market. 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 experience, has been instrumental in achieving these new wins and driving growth. Throughout the past month, we announced many new project wins in the U.S. and Europe. SuperCom continues to displace incumbent vendors and achieved an over 65% win rate in European competitive tenders. Despite macroeconomic uncertainty, SuperCom’s solutions are becoming increasingly relevant. Factors like high recidivism rates and the escalating cost of incarceration make our solutions not only cost-effective but also essential for governments looking to enhance public safety and reduce costs. The company’s PureSecurity Technology solution has been designed to address this trend, offering an effective way for institutions to enforce home confinement, ease prison overcrowding and substantially lower costs. For example, the total daily costs for monitoring an offender on home confinement or GPS monitoring is approximately $10 to $35 compared to the much higher cost of $100 to $140 per day 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 the adoption of victim protection solutions worldwide. We align perfectly with our strategic plan and the launch of our new product, PureProtect. In the European market, SuperCom expanded its business into over 10 countries and secured significant new contracts, which are typically awarded through a competitive tender process. SuperCom launched a $3.6 million national EM project in Finland, with the national government in Q1 of 2023, and by May 2023, the PureSecurity EM solution was fully deployed in Finland, covering all EM offender programs, house arrest, GPS and inmate monitoring for the country. In Q3 2023, we secured a new national program with the Finnish Government to deploy our domestic violence monitoring solution. The deployment of our efficiency suite consisting of PureProtect, PureTrack, PureTag, and PureMonitor demonstrates the versatility and effectiveness of our solution and underscores our leadership in the electronic monitoring space. Our collaboration with Finland is a prime example of the confidence that clients have in SuperCom, and those who experience our services often choose to broaden their engagement with our diverse array of solutions. Notably, the company won the largest industry award of the year for national electronic monitoring projects in Romania, valued at $33 million, which includes up to 15,000 monitored offenders per month for up to six years, and that’s just one project in one country. So imagine the breadth and spread of our solutions around the world. Looking beyond Q3, we recently announced a third order valued at over $3.4 million for the Romanian Ministry of Interior, further extending our engagement in the country’s national project. This frequent order reinforces the strength of our PureSecurity suite and cements our position as a trusted partner for governments worldwide. We have also launched our domestic violence solutions in other European regions and are planning to launch them in the U.S. very soon. In Israel, there’s a high potential for new domestic violence projects as the government has passed a law requiring domestic violence offenders to be monitored with technology 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 still prioritizes the expansion of PureOne into new markets and geographies. We have also launched our domestic violence solutions in other European regions and the U.S. There’s high potential for domestic violence projects as the government has just passed a law requiring domestic violence offenders to be monitored with technology such as ours. Our expansion in the U.S. market has been marked by another significant milestone with the securing of a $3 million contract in California through our subsidiary, LCA. This contract for Alcohol Monitoring technologies reaffirms our commitment to delivering high-quality services and is a testament to our robust reputation in the Alcohol Monitoring industry. With this contract, we anticipate a steady stream of recurring revenue over the initial three-year term with a potential for future expansion. And as we have mentioned before, we believe there’s also an opportunity to enhance our U.S. growth through strategic acquisitions of local electronic monitoring service providers with a strong reputation and customer base in respect to local markets. We are continuously monitoring the market for potential acquisitions that could generate significant value by immediately expanding our market presence and providing vertical integration synergies. Our acquisition of LCA in 2016, for example, for $3 million is a great example of this. This successful acquisition has proven to be a great strategic value with over $30 million of new project wins it has generated since then in California alone. During the third quarter, we completed a successful close of a $2.75 million public offering to support the company’s continued innovation and growth initiatives, a testament to the investment community’s trust in our vision and strategic trajectory. I will now turn to financials. During our previous conference call, I mentioned that we anticipate contributing to our financial results in the next quarter as our ongoing projects matured. I am delighted to share that we have seen remarkable operating improvements, as evidenced by the increase in our gross margin to 59.4%. Our gross margins improved from 34% last year, and in many of the previous quarters, that was the level. We have also achieved a five-year record GAAP net income positive for the first time in some years. This is driven by our projects moving into later stages of the life cycle, where higher margins are typically achieved. I’d also like to note that for the nine-month year-over-year, revenue increased by 67%, reaching $21 million, with our IoT division being the primary growth engine. In perspective, while the global electronic monitoring market grows at approximately 11% per year, SuperCom IoT revenues outpaced global market growth by multiples. This growth is a testament to the fact that the market prefers our solution over the alternatives time and time again. Furthermore, we are proud to have sustained positive EBITDA in each of the last three years, 2020 to 2022, and achieved EBITDA increases of 550% to $2.7 million in the third quarter of 2023, reaching a level of EBITDA of $3.9 million in the first nine months of 2023, which resulted from operating leverage, targeted spending and high year-over-year increases in revenue. The following is the comparison between the financial results of the third quarter of 2023 and the third quarter of 2022. We will do this brief comparison and then open up for Q&A. Our gross profit increased by 89% to $4 million, compared to $2.1 million, which is a direct outcome of the progress we maintained across our projects. Our margins typically enhance as projects mature. We achieved a $580,000 decrease in total operating expenses, excluding one-time other expenses through a corporate operational optimization plan that was implemented gradually over six months. We decreased our R&D expenses by $180,000, while we continue to develop and launch two products and improve existing ones, keeping us at the edge of innovation and technology leadership in our space. Our sales and marketing expenses decreased by $120,000, and general and administrative expenses decreased by $280,000. The company had an operating profit of $840,000 versus an operating loss of $850,000, resulting from the significant increase in our gross margin and profit and a decrease in our operating expenses. The company’s EBITDA improved by $2.3 million to $2.7 million compared to $0.4 million, reflecting the benefits of operating leverage associated with higher revenues, deploying new IoT projects and continued progress in the face of our ongoing projects. This achievement underscores our focus on sustained growth and profitability. Our net income improved by 107% to a profit of $0.15 million, compared to a $2.2 million loss, and our non-GAAP net income improved by $2.6 million to a profit of $1.6 million, compared to a $1 million loss. Positive non-GAAP EPS improved to positive $0.24, compared to negative non-GAAP EPS of $0.02. Our cash position has been stable, and we have credit facilities that reduce our need for cash as we continue to win and execute large projects. In addition, the company had one-time expenses of $800,000, mainly pertaining to legacy business settlements and allowance of doubtful debt. In closing, we are excited about the growth we are experiencing due to the growing demand for our products. After five years through which we transitioned from our legacy identification business to the IoT tracking of offenders business, we are happy to show the shift to rapid growth in revenue and profit margins. We believe that we are well positioned for continued growth by capitalizing on the many new opportunities that lay before us. These are being 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, the growing public policy shift to monitoring instead of incarceration, and the growing adoption of domestic violence prevention solutions. We anticipate sustained growth by further expanding our market share in the U.S. and Europe, and our commitment to preserving our technological advantages and our robust growth foundation remains steadfast as we continue to invest in these areas. With that, I will now turn the call over to the operator for questions.

Operator, Operator

Your first question is coming from Matthew Galinko from Maxim Group. You are now live.

Matthew Galinko, Analyst

Hey. Thanks for taking my question. Ordan, I hope you are staying safe. Also, congratulations on a great quarter and year-to-date. It's been wonderful to see. Can you discuss the recurring revenue and whether you have an idea of what the baseline is? If you don't have a major project shipment in the quarter, what is the typical decrease you might expect?

Ordan Trabelsi, President and CEO

If we don’t get a big shipment this quarter? Our revenues in Romania are mainly through continued progress, and this project is supposed to continue for years. So we expect to lead for the next few quarters for things to continue, and they might even grow, and we also expect new projects to come in. So we are at a pretty good level, as you could see each of the last, I think, four or five quarters, revenues were about $6 million. We continue to deploy the project in Romania. And what’s very interesting in this quarter, as you noticed, we had a huge jump in gross margins, which is something that we have been forecasting for a long time. We mentioned that once the projects move into later stages, there’s not as much cost since you can just provide equipment because you have all infrastructure ready, you have already trained everyone and the system works very nicely. And in Romania, we have a very good relationship and things are working well and they are ordering more and more, and that’s what we see in other projects around the world as well. So when we have a big new project, in the beginning, the margins are not as high, but over time, they will shift up. That’s what we are starting to see here in the first quarter.

Matthew Galinko, Analyst

Got you. And I think you announced a $3.4 million order from Romania that’s supposed to ship in the fourth quarter. If I understood that right, can we kind of expect that since that project is pretty far down the track that the margin profile should be kind of similar to what we saw in Q3 or at least higher than it was in the early stages?

Ordan Trabelsi, President and CEO

Yeah. We expect the margins to continue to be higher than what they were originally. As you are aware, sometimes there are fluctuations between quarters, so it might be a little higher, it might be a little lower, but we certainly expect to be at this higher level of margin rather than how it was before when we were just shipping tons of hardware and installation and training during the passive stage in Romania. Now, based on what happens to new projects, that could shift, as you are aware our revenues are a mix of many different projects around the world. If something massive, let’s say, a $100 million project comes in, at the beginning, that would shift margins, but it would only be temporary because at the end of the deployment, margins will shoot up again. But the margins in this industry have capacity to be very high between 50% and 75% and even more if we continue to deploy more units in existing regions. Our strength has been, as you can see, as we just announced in Finland and other countries. Once we deploy one technology, we keep on deploying more technologies, more units, and more capabilities to work there. So deployments set the infrastructure, and now you are just generating high margin revenues with high margin products and offering great ability to the customer at a low cost.

Matthew Galinko, Analyst

Got it. Thanks. And last one for me, and then I will jump back in the queue. It sounds like you have moved through the Romania contract relatively quickly. I don’t know if you are comfortable talking about how close you are to that 15,000 number, but is there potential to expand the scope of what you are doing with Romania beyond the initial baseline that could sort of maybe add more seats or units? I will leave it at that.

Ordan Trabelsi, President and CEO

Of course. First of all, there’s always potential for these kinds of projects to grow. Romania is a very interesting case. They didn’t have electronic monitoring before. This is brand new for them, and they are moving very fast with orders and deployments. I don’t have an exact number for you, but there’s definitely potential for the numbers to grow. There’s also potential for additional capabilities with every project. For example, in Sweden, we started with a project of $1 million for the police and then we did $7 million in the Ministry of Justice in Sweden, and now we are just expanding in Sweden. Romania has just started. We create opportunities there and in many other countries. But our reputation with every new project we get, and with every new region that we expand into, continues to grow and spread now, new customers in Romania and new customers in Croatia, which is also brand new. We are also getting requests from other places in the world, even outside Europe and outside the U.S., all over the world, to partner with us. They have colleagues in different countries with similar roles, and they see what we are doing, and of course, it’s much easier to pick someone that everyone has already picked. Originally, we had hard times; this has been five, six, or seven years ago, but now things are much more consistent and much easier. Now we are focused on just continuing to operate effectively and maintain what we are doing.

Matthew Galinko, Analyst

Thanks, Ordan. I will jump back in the queue.

Operator, Operator

Thank you. Your next question is coming from Matthew Galinko from Maxim Group. Your line is live.

Matthew Galinko, Analyst

All right. I guess I will continue. And you talk about…

Ordan Trabelsi, President and CEO

Hi, Matt.

Matthew Galinko, Analyst

Hi, again. What is the pipeline opportunity, I guess, as you see it now for PureOne in the U.S. market? Is the pipeline pretty well built today or where are we at in that kind of engaging with the potential customers and getting evaluations into their hands?

Ordan Trabelsi, President and CEO

Great question. We talk a lot about PureProtect, which is domestic violence. Just so we clarify the difference because we talked about both in the script. Domestic violence is not something that has been very well addressed in the market. It’s mostly been house arrest and GPS monitoring. Our solution comes in very nicely in domestic violence. Our technique uses the smartphone, so that’s a mandatory device. If you get a brace on your leg in Romania, as someone comes close to the wife, the alarm alerts both the police and the victim. That’s our PureProtect. PureOne, which I also mentioned on the call, is somewhat different. It’s also brand new, but it’s the GPS monitoring. It’s in the major part of the industry, which is GPS tracking. We have been expanding with our special smartphone solution. This is an all-in-one solution. It doesn't require a smartphone. We have seen amazing feedback; people love it, and it works very well. We have started deploying it also in California, giving it to various retailers and customers in the U.S. So far, we have received amazing feedback; people love it, it works very well, and they are excited to continue spreading it out in the U.S. The platform in the U.S. is more fragmented, unlike Europe, but it will be when we reach a state level and the federal level. Right now, we are still at the county level and the retailer level. We have our hands in a lot of different places and we won it that way, because this is how you get good feedback before potentially making a wrong move like California State or Florida state. So we are just like we have done many times over. We have been doing it for many new products in this PureSecurity suite. We give it out to smaller customers, we get feedback, we update, we improve, add more features, and just streamline the solution. Then as it gets more and more stable, more and more robust, it starts to get larger projects later. In Europe, we started with a $100,000 project in Latvia and then moved up to $3.6 million in Finland and $3.7 million in Denmark. Here in the U.S., over time, the market is 4 to 5 times bigger than the European market. Everything you have seen up to now with nice growth is only the beginning; since 2021, we have just been growing and reached very nice operating profitability margins as well. So that could continue several times over when you put the U.S. market into play. We think PureProtect and PureOne together are going to create substantial business.

Matthew Galinko, Analyst

That sounds pretty encouraging, especially the feedback from the U.S. market. I understand it's still some time away and you likely have many projects in progress, but we have previously discussed some large European contracts that may soon be available for bidding in the next 18 months or so. Could you provide an update on that pipeline of significant European deals and how engagement is progressing?

Ordan Trabelsi, President and CEO

Yeah. There are some large European deals out there. We have over 10 countries in Europe, but there are still plenty of others. Some of them reached out to us to talk about domestic violence because our domestic violence solution is second to none. It doesn’t exist on the market in the current system, but they have different programs and some are going to have a bid for all the programs that are out there. Israel right now is planning to select for a new updated project in normal electronic monitoring of offenders and also domestic violence. The law just passed in Israel. You could see in the Parliament in Israel, the centers are holding bracelets. They are petitioning for a domestic violence solution, which is very important. There are opportunities that never existed before, and existing projects go out for bid every five years. We displace almost every one of our competitors, even those that have been there for 10, 15, 25, or 40 years. It’s usually hard to be displaced, but when technology is significantly better than the existing one, that’s what happens. We continue to invest in R&D to ensure we are always on cutting-edge technology, and we do expect that as more projects come out of Europe, there will be continued win rates. Our revenues grow along with the number of units and the customer base. That makes it easier to win. It started hard at the beginning, but it is getting easier and easier.

Matthew Galinko, Analyst

All right. Thanks. A couple quick additional ones for me. I think in your press release you talked about a secure ID card win in Iceland. I know that’s not your core business, but can you talk a little bit about what that is and when you expect that to impact results?

Ordan Trabelsi, President and CEO

We did have a project there for years. We do passports for Iceland and we expand the modules and capabilities they want. We had a new expansion recently that we have been working on, and we are also developing their ID card for customers. That’s been moving along, and in 2024 we expect that to be finished. The customer has been with us for over 15 years. It’s a small customer, but it’s been with us for a long time. Every customer is important, especially those that have been with you for a long time. They have good things to say after all these years. So we try to provide great service to all of them, and when they want to update from passport to ID or ID to other things, we do that. Even though it’s not part of our legacy business, we still support our customers and once in a while new projects come in also in identification. It’s not where our sales focus is, but we still support it.

Matthew Galinko, Analyst

Got it. All right. Last two, one being it looks like your receivables were up in the third quarter. So it looks like that was a kind of investment in working capital. I guess, I don’t know if it’s something you could talk about, but it’s probably a higher number because revenue has been up, but can we kind of expect that receivable number to come in the fourth quarter or for that to come down into 2024 as a source of capital or just curious how you think about it?

Ordan Trabelsi, President and CEO

It could be. Since we shifted from the legacy business to the new business, collections have actually been good. It’s been great. The working capital grows because of the payments of the projects at the same time line that the revenue progression. Revenue progression is upon delivery and upon a percentage of completion sometimes, and the collections are in certain milestones that have happened to reach. So there could be a decline in Q4 or Q1, it depends when those milestones are concluded by the customer’s point of view. We are continuously working on them for many different customers at the same time.

Matthew Galinko, Analyst

Got you. And maybe just another way to frame the same question. EBITDA, very strong for the third quarter and positive year-to-date. Is that a good proxy to use for your operating cash flow? So $2.7 million of EBITDA, is it reasonable to expect to be breakeven to positive on an operating cash flow basis?

Ordan Trabelsi, President and CEO

Sometimes there is a timing issue, just as we talk now. Sometimes you have revenue recognition before we actually collect the cash, and that’s going to have an offset in timing when the cash comes in. So the operating cash flows will be more dependent on the payments from customers and with these complicated projects with multiple stages, the payments are not always aligned with revenues. That’s why you will see a little bit offset. But if you take many quarters into account and you average them, then yes, excluding the one-time items, you will see that cash flow is more stable and predictable. As things stabilize in the legacy business and more of legacy and new things are steady, the differences in project collections will level out, leading to a more predictable business and consistent revenue growth supported by our leading technology and continuous pipeline of opportunities around the world.

Matthew Galinko, Analyst

Got it. Thank you. And final question, 2024 outlook, again, might not be ready to provide any forward commentary on that. But after a very strong 2023, what can investors expect from 2024? It sounds like you have a lot in the pipeline, but is it a good year if you hold the level with 2023 or are you looking to grow off that very strong base?

Ordan Trabelsi, President and CEO

We are always looking to grow and if you look at what we have done in the last few years, new management and myself and others, then new members came into the company. In 2021 we have been pushing very hard, which is reflected by the numbers. That being said, I will talk very diligently to under promise and over deliver. So we will under promise now and hopefully over deliver and excite investors in the quarters to come.

Matthew Galinko, Analyst

All right. Terrific. Thank you for taking my questions.

Ordan Trabelsi, President and CEO

Thank you.

Operator, Operator

Thank you. At this time, we will be passing the call back to Ordan for closing remarks. Your line is live.

Ordan Trabelsi, President and CEO

I want to thank all of you for participating in today’s call and for your interest in SuperCom. Please contact us directly if you have any additional questions, and 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.

Operator, Operator

Thank you, everyone. This concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.