Earnings Call Transcript - SPCB Q1 2023

Operator, Operator

Ladies and gentlemen, good morning, and welcome to SuperCom's First Quarter 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 being recorded for playback purposes. I'd now like to turn the call over to Stephanie Prince of PCG. Stephanie, over to you.

Stephanie Prince, Moderator

Thank you, Matthew and thank you to everyone joining us. 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 may involve risks, uncertainties, and other factors that may cause SuperCom’s actual results to differ materially from those statements. For 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, on Form 6-K, and SuperCom’s press release that accompanies this call, particularly the cautionary statements in it. Today’s conference call also 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, our 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, May 15th, 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?

Ordan Trabelsi, CEO

Thank you, Stephanie. Good morning everyone. Thank you for joining us today. Earlier this morning, we issued a press release of our financial results for the first 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 Q1 results, followed by a Q&A session. SuperCom had a great start to the year with a strong first quarter. We achieved record-breaking revenue of $6.4 million, representing a 109% year-over-year growth in quarterly revenue, marking three consecutive quarters of very high year-over-year revenue growth. This is the highest revenue figure we achieved in a single quarter since 2018. I'm thrilled with this outstanding performance and look forward to maintaining its momentum in the coming quarters. During the quarter, we executed various advanced projects in our portfolio, such as the $33 million National EM project in Romania, utilized operating leverage and prime investments in our proprietary technology to achieve positive EBITDA for the third consecutive quarter. For those new to SuperCom, our mission is to revolutionize the public safety sector worldwide through proprietary electronic monitoring technology, data intelligence, and complementary services. Over the past 35 years, since our founding in 1988, we've been trusted partners to dozens of governments worldwide, providing them with cutting-edge electronic and digital security solutions. Our strategy has been to deliver our technology, develop top-notch solutions, expand our presence, and deliver outstanding services. We successfully executed our strategy by focusing on the following key factors. Our proprietary electronic monitoring technology scores highly compared to our fees and supports various programs such as house arrest, GPS monitoring, rehabilitation services, domestic violence prevention, and more. SuperCom has won over 50 new multi-year governmental projects since 2018 and just in the past year alone, announced launches in projects valued at over $40 million. Our strong implication and recognition as a premium provider of electronic monitoring technology and services also contributes to our win rate. With each new customer win and project deployment, we further strengthen our reputation, technology offering, and competitive position. Third, with our strategic focus and attention to our IoT tracking business in developed countries where the opportunity is the greatest. The electronic monitoring market is estimated to reach $2.1 billion in 2026, up from $1.2 billion in 2021. The US and Europe constitute about 95% of this market. In Europe, there's recently been an increase in RFP activity, with numerous new project bid opportunities in the past 18 months. Altogether these exceptional opportunities have resulted in a growing pipeline of projects. Last year, we continued to invest in R&D to ensure our products remain the most competitive in the market and continue to introduce new features and technology through our proprietary platforms. As a result, we successfully finalized the development and deployment of two new products, one is the life-saving PureProtect for domestic violence monitoring, which was successfully implemented in multiple projects, including a $33 million National EM project in Romania with a focus on domestic violence. The other is an all-in-one ankle bracelet monitoring solution called PureOne. Both products have been well received and significantly expand the company's addressable market. We are confident that both products will facilitate our potential to enter the US market. In recent quarters, we not only maintained our technological advantage, but also invested in enhancing our operational infrastructure and expanding our workforce. Furthermore, we've boosted the company's global sales efforts by recruiting new sales team members with industry expertise to drive our shift from passive bidding to an active outreach sales strategy. Throughout the year, we announced many new project wins in the US and Europe. We're super proud to be continuously displacing incumbent vendors with over a 65% win rate in European competitive RFPs. We're proud to have won so many new contracts in such a short period of time, especially during economic uncertainty and market volatility due to the looming threat of recession and unstable geopolitics. Our business is recession-resistant in nature and as the possibility of a potential recession increases, we have multiple tailwinds that support our growth. As many of you have heard me describe before, these global factors include high recidivism rates of roughly 75%, prison overcrowding of over 100%, and high incarceration costs. In 2020, the US alone spent over $80 billion to keep approximately 2.3 million people incarcerated, which equates to nearly 1% of the US population. For these reasons, among others, we see a growing global trend of governments turning to innovative solutions and alternatives to incarceration to ensure public safety, and our PureSecurity technology solution has been designed to address those trends. PureSecurity provides an effective way for institutions to enforce home confinement, while easing prison overcrowding and significantly lowering costs. For example, the total daily cost for monitoring an offender at home confinement or GPS monitoring is approximately $10 to $35, compared to the 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. On top of these growth drivers, we have witnessed a surge in the adoption of victim protection solutions worldwide, which aligns perfectly with our strategic plan and the launch of our new product, PureProtect. During the past year, we extended our presence across Europe by winning significant new contracts, which, as I mentioned, are typically awarded through competitive RFP processes. As a result, SuperCom now does business in over 10 countries across Europe and we look forward to increasing that number in the years ahead. Last year, we received one of the largest industry awards of the year for the National Electronic Monitoring Project in Romania valued at $33 million, which includes up to 15,000 monitored offenders per month. Our domestic violence solution in PureProtect is expected to enhance the security of many families as part of this project for over the next six years. Just a few weeks ago, we announced that we received a $7.1 million follow-on order for this project, a second order under the existing contract, which follows the initial order of over $8.1 million. We've also launched a domestic violence solution in other regions of Europe and are planning to launch them in the US soon. In Israel, there's potential for a new domestic violence project. The government is trying to pass a law requiring domestic violence offenders to be monitored with technology like ours. Finland was one of the most recent projects launched in the first quarter of last year. The $3.6 million national monitoring project was awarded by the national government to deploy SuperCom's PureSecurity electronic suite. We're also working to increase our US business. We're proud to have made good progress towards our goals with multiple projects in California, Idaho, Texas, and Wyoming in 2022. In the fourth quarter, our wholly-owned subsidiary in California, called Leaders in Community Alternatives, won a new project contract valued at approximately $4.25 million. LCA has provided services in these counties for many years, including adult reporting services and electronic monitoring. The new program expands its scope to include jail-based sites and several community-based sites. It also focuses on re-entry services, including case management, substance abuse, education, job preparedness, and criminogenic risk reduction. The program was already launched in Q1 of 2023. Our new strategic sales teams' wins have been the first step in executing the company's US market expansion strategy and have already driven increased activity for existing customers with numerous new demos and evaluations with potential new ones. We believe there's also an opportunity to enhance our US growth through strategic acquisitions of local electronic monitoring service providers with a strong reputation and customer base 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, less than one-times revenues, has proved to be a great strategic value for us, generating over $30 million in new project wins in California. I'll now turn over to the financials. During our previous conference call, I mentioned that we anticipated contributions to our financial results in Q1 from projects we discussed. I'm delighted to share that our revenue has recorded a remarkable year-over-year growth of 109%, amounting to $6.4 million in the first quarter. This follows the 102% and 59% year-over-year revenue growth from the previous two quarters, Q3 and Q4 of 2022. To put things into perspective, while the global electronic monitoring market grew at approximately 10% in 2022, SuperCom's IoT revenues achieved a staggering 76% growth during the same period. This growth is a testament to the fact that our market prefers our solutions over the alternatives. Furthermore, in 2022, we successfully returned a positive EBITDA and are proud to have maintained this achievement. For the third consecutive quarter, we achieved positive EBITDA, specifically, we achieved an EBITDA of $0.4 million for Q1 2023, driven by targeted spending, operating leverage, and significant year-over-year increases in revenue. Gross profit increased by 19% to $1.6 million compared to $1.3 million before. This increase was concurrent with increases in the cost of goods, which resulted from supporting the launch phase of the mentioned new projects. Typically, the initial project stage entails higher expenses, while advanced stages yield higher gross margins. There can be fluctuations in our gross profit depending on project composition and deployment stages. A short-term decrease in gross profit is an indication of long-term growth potential depending on project portfolio changes. Despite significant increases, we managed to maintain our operating expenses at roughly $2.6 million per quarter. So, while our revenues grew by $3.3 million from Q1 2022 to Q1 2023, our operating expenses remained roughly the same, indicating the strong operating leverage opportunities inherent in our business. As we deploy additional bracelets in regions or rerun existing projects on our existing infrastructure, the contribution margins for each additional bracelet can be as high as 70% or more. Our net income in Q1 2023 improved to a $1.5 million loss compared to a $2.3 million loss in Q1 of 2022. Our cash, cash equivalents, and restricted cash balance at the end of 2022 was $3.9 million. The credit facility is in place and reduced our need for cash as we continue to launch new projects and progress on existing ones. We will continue to invest in our sales and marketing as well as in R&D to drive revenue growth, expand our global footprint and execute our business plan. In closing, we're excited about the growth we are experiencing and the increasing demand for our products. We're seeing very high year-over-year growth in revenues for the third consecutive quarter and believe that we're well-positioned for continued growth by capitalizing on many opportunities before us. These are being driven by multiple factors, including our strong presence and reputation in the US and European markets, the countercyclical nature of the electronic monitoring industry, and the growing public policy shift to monitoring instead of incarceration. We anticipate sustained growth by further expanding our market share in the US and Europe, our commitment to preserving a technological advantage, and a robust growth foundation remains steadfast as we continue to invest in these areas. And with that, I'll turn the call over to the operator to open up for questions.

Operator, Operator

Certainly. Your first question is coming from Matthew Galinko from Maxim Group. Your line is live.

Allen Klee, Analyst

Good morning. This is Allen Klee from Maxim Group. The first question I had was, can you talk about your strategy towards expanding the domestic violence solutions into the US market and the timing? And then also potential opportunity in the US with homeland security? Thank you.

Ordan Trabelsi, CEO

Great, thanks for the questions. We started with the European market in recent years, also because of the proximity to Israel and a lot of our experience. But also because we developed very sophisticated products which had a good reception in the European market. Now, as we develop additional products such as the domestic violence solution, which is new in the industry and other players cannot provide or offer anything similar, we're able to expand into new projects in Sweden, in other countries in Europe, and also in Romania, which is just one of the largest projects in the field at $33 million last year. In the US, we've had a lot of demand from various retailers and counties and states for similar solutions. Using our domestic violence solution, SuperProtect, we think we can gain great traction in the US. We're currently in stages with both PureProtect and PureOne where various potential customers, retailers are trying out the solutions. As we get closer to a full deployment, we expect to have potential expansion, of course, into California where we have a strong presence, but also into many other states which we've been working in before as well as new ones. We expect good reception to the product and as we make full adaptation to the US market with these offerings, we anticipate great traction and progress. Regarding homeland security, if you're talking about identification and biometrics like we've done in the past with our traditional business, our legacy business, identification, we've done projects for passports, driver's licenses, visas, and others. In the US, the company also won a project back in the early 2000s around passport creation. But currently, our focus is on electronic monitoring. There are several projects in electronic monitoring as well, such as ICE when they look at the border with Mexico, and there are also very large state projects in the US. You see the numbers of the amount of offenders being tracked either at home or GPS monitoring or domestic violence growing every year. So we do expect opportunities in the US; the market there is much larger than in Europe. As we expand from small counties to larger states and then into potential federal projects, we believe our technology will be a key factor in this expansion.

Allen Klee, Analyst

Thank you. Can you comment on the pipeline of large opportunities in Europe and potential timing?

Ordan Trabelsi, CEO

So in Europe, there has been increased activity recently, and we've been involved in various opportunities. There are some very large ones that are still outstanding, and we're waiting to hear back on. It could be any week, it could be in the coming months. Sometimes these are out of our control and can take some time under government processes. Last year, in the third quarter, we were awarded the $33 million national project in Romania. It's the largest project; it's the first project in Romania that has undertaken electronic monitoring, the largest one in the industry awarded in Europe. We also had the first project for Croatia last year, awarded, and there are some other projects in Europe that we're eagerly waiting to hear about as well.

Allen Klee, Analyst

Can you provide, help us understand the revenue recognition of the follow-on order from Romania?

Ordan Trabelsi, CEO

Yeah, so the initial order was over $8.1 million and that was last year, and we deployed it already, and it will be recognized in Q1. The follow-on order of $7.1 million, which we received in Q1, is expected to be delivered within the first two quarters of 2023, and accordingly, the revenue recognition for that order will be tied to the same timeline if the deployment is done as expected.

Allen Klee, Analyst

So I'm sorry, was the revenue recognized already or will it get recognized in the first two quarters of 2023, or how does that work again?

Ordan Trabelsi, CEO

The first $8.1 million was recognized, and now the additional order of $7.1 million that we received in Q1 is expected to be delivered within the first half of 2023. Accordingly, the revenue recognition will be tied to that same timeline if deployment is completed as expected.

Allen Klee, Analyst

Thank you. What is your recurring revenue level?

Ordan Trabelsi, CEO

Good question. In the past, it has been a little above 80%. In some of the recent quarters, this has been closer to 70% due to the remaining projects that have large deployment components. But it can fluctuate between 70% and 80%, depending on the project mix and revenue mix at that exact moment.

Allen Klee, Analyst

Thank you. So you made a comment that your expenses have been much slower growing than revenues. Is that something that you think you can continue as hopefully revenue continues?

Ordan Trabelsi, CEO

Yes, certainly. Our operating structure here in Israel and the US is pretty stable. With the same structure, we can support more projects, and we can certainly support more units per project once we deploy a project that's in Sweden or Denmark or Romania. The amount of additional units incurs very little additional work for us because it all runs in the same infrastructure. We have the ability to manufacture thousands of units really quickly, and that operates on our existing cost structure. Therefore, as our revenues continue to grow, we expect that our operating costs will grow much slower, and the gross margins could expand accordingly, especially when we add additional units in existing locations with deployments.

Allen Klee, Analyst

Thank you. Last question. You mentioned that you've been displacing incumbents in contracts. What is the reason why you've been winning from incumbents?

Ordan Trabelsi, CEO

Great question. In Europe, we've had over a 65% win rate in much of the recent years. Typically, these projects are scored on various factors, one being the technology score. Not just how good the technology is, but innovation—is there something new being brought to the table versus others? We consistently have scored very highly on technology and innovation. Furthermore, they want to see a track record, and we have a very large portfolio of experience in deployment with over 50 projects in the last few years, and a lot of them are recent projects, which are very relevant, giving us a very good score. Along with pricing, timelines, and other factors, where we are on par with other vendors, we excel with technology score and innovation. Additionally, we have a smartphone model, and because our bracelet has the longest battery life in the industry, it seamlessly works with smartphones, offering a plethora of features that others cannot. This helps with domestic violence cases, where the offender wears an ankle bracelet, and the victim can track their proximity via smartphone. That is how we typically win, and we continue to enhance our solution and proprietary offerings. With every new project, we add more capabilities and then offer those forward to new projects and new opportunities, maintaining a competitive edge.

Allen Klee, Analyst

Thank you very much.

Ordan Trabelsi, CEO

Thank you.

Operator, Operator

Thank you. At this time, we will pass the call back to Ordan for closing remarks.

Ordan Trabelsi, 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. We look forward to sharing our progress with you on our next conference calls, filings, and press releases. Thank you and have a good day.