Earnings Call Transcript - SPCB Q4 2023

Operator, Operator

Ladies and gentlemen, good morning, and welcome to SuperCom's Fourth Quarter and Year End 2023 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. Joining me from SuperCom's leadership team is Ordan Trabelsi, SuperCom's President and Chief Executive Officer. During this call, SuperCom'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 these 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 results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, a comparable 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, April 22, 2024. Except as required by law, SuperCom disclaims any obligations 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 thank you for joining us today. Earlier this morning, we issued a press release with our financial results for the fourth quarter and full year of 2023, which you can find 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 Q4 and 2023 results, followed by a Q&A session. I'm excited to share with you SuperCom's outstanding performance in 2023, which reflects the tremendous strides we've made in our operations and financial position. 2023 was a landmark year for us. Annual revenue increased by 51% to a five-year record level of $26.6 million, and the company reached a five-year record positive EBITDA of $4.8 million, reflecting the sixth consecutive quarter of positive EBITDA after years of investing in our leading edge IoT technology. We also continued to improve our operating cash flow significantly from operating cash used of $9.4 million in 2021 to $4.7 million in 2022 and to only $2.4 million in 2023, decreasing our cash used by 75% in the past two years, reflecting positive cash flow generation from new and old projects. This reflects progress in the right direction towards self-sustainability and positive cash flows. 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 contract awards in the U.S. and Europe, and we're excited about the opportunities we see ahead. I'll go into more detail in a few moments, and we're proud of these meaningful achievements. I'll take a moment here and thank our global team at SuperCom for their hard work and dedication to making this all possible, thank you. For those new to SuperCom, our mission is to revolutionize the public safety sector across the globe with our proprietary electronic monitoring technology, data intelligence, and suite of complementary services. With over 35 years of experience since our founding in 1988, we've 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: lead with innovative technology, develop superior solutions, expand our global presence and deliver outstanding service. This 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. Since 2018, SuperCom has secured over 50 new multi-year government projects. Our strong growing reputation as a premium provider of electronic monitoring solutions and services enhances our market position with each new customer win. Our strategic focus is on IoT tracking business in developed markets where opportunities are 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 successful opportunities have resulted in a growing business pipeline with strong recurring revenues. In 2023, we continued to amplify our technology 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 are pivotal to SuperCom's market expansion. PureProtect is a life-saving domestic violence monitoring solution that provides improved protection to families suffering from domestic violence. The innovative solution addresses domestic violence issues and further enhances the company's portfolio of products and services. PureOne is an all-in-one GPS tracking ankle bracelet monitoring solution that integrates comprehensive monitoring capabilities into a single device. Like many of our products, it offers top-notch features, placing it above the competition in most metrics. This product also expands the company's addressable market. We've been very pleased with the reception and traction from this new solution and expect it to help facilitate the accelerated expansion of SuperCom into the U.S. market and further in European countries. We fortified our operational infrastructure to support our growth and have 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. We announced new project wins in the U.S. and Europe over the past few months. SuperCom continues to displace incumbent vendors and achieved an over 65% win rate in European competitive tenders. Despite macroeconomic uncertainty and the ongoing Israel-Gaza war, 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 lower costs significantly. 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 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 adoption of victim protection solutions, which aligns 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 with significant new contracts, which are typically awarded through a competitive tender process. SuperCom launched a $3.6 million national electronic monitoring project in Finland with the national government in Q1 2023. By May 2023, the PureSecurity electronic monitoring suite was fully deployed in Finland, covering all electronic monitoring offender programs, house arrest, GPS and inmate monitoring. In Q3 2023, we secured a new national program with the Finnish Government to deploy our domestic violence monitoring solution. The deployment of our PureSecurity suite consisting of PureProtect, PureTrack, PureTag and PureMonitor demonstrates the versatility and effectiveness of our solution, underscoring 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. So, if we start with one solution, there's ample opportunity in deploying the others, as seen here. Notably, at the end of 2022, the company won the largest industry award of the year for a national electronic monitoring project in Romania, valued at $33 million, which includes up to 15,000 monitored offenders per month for up to six years. And in 2023, we announced orders valued at over $10 million for Romania's Ministry of Interior, further expanding our engagement in the country's national electronic monitoring project. These projects reinforce the strength of the PureSecurity suite and cement our position as a trusted partner for governments worldwide. We've also launched our domestic violence solutions in other European regions and have recently launched them in the USA. In Israel, there's a high potential for new domestic violence projects as the government has just 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 strategically prioritizes PureOne expansion into new markets and geographies. It has already received high praise during its introduction into various regions in the U.S., where PureOne has been successfully deployed and is actively utilized to monitor live offenders. Moreover, sales activities for PureOne have commenced in promising new markets outside Europe and North America. Our new strategic sales team and new wins have been the first steps in executing the company's U.S. market expansion strategy and already driving increased activity with existing customers and numerous new demos and evaluations of potential new ones. Our expansion in the U.S. market has been marked by another significant milestone when we secured a new contract with California through our subsidiary, LCA. Since the launch of the PureOne solution in late 2023, we have already secured two new contracts in California and another contract in Canada to provide the solution. Introducing the PureOne solution has been a game changer in securing these contracts. It underscores our competitive edge and commitment to delivering innovative and superior technology solutions. By securing these contracts, we further reinforce our position as a market leader. We view our recent wins as indicators of our growing influence and expansion potential in North America and worldwide. As we 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 their respective markets. We are constantly monitoring 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 of this approach. This successful acquisition has proven to be of great strategic value through over $30 million of new project wins it has generated since then in California alone. I'll now turn to the financials. During our previous conference call, I mentioned that we anticipated contributing to our financial results in the next quarter as the ongoing projects mature. I'm delighted to share that we've been able to sustain positive EBITDA in the last four years in total, from 2020 to 2023, and seen remarkable operating improvements, as evidenced by our five-year record EBITDA level this year, 2023, of $4.8 million. This is driven by a significant growth in the company's revenue, along with execution in optimizing corporate and cost cutting. I'd also like to note that our annual revenue increased 51% to a five-year record, $26.6 million annual revenues, with the IoT division being the primary growth engine. In perspective, while the global electronic monitoring market grows at approximately 11% per year, SuperCom's IoT revenues outpaced global market growth by fourfold to fivefold in each of the past two years. This growth is a testament to the fact that the market prefers our solution over the alternatives. Revenue from developed countries continues to increase, with revenue from European countries increasing by 85% in 2023, reflecting the completion of our transition plan to transform our business from less stable emerging countries to more stable and consistent developed countries. The following is a comparison between the financial results of the fiscal year 2023 and fiscal year 2022. Gross profit increased by 60% to $10.2 million compared to $6.4 million, which is the direct outcome of revenue growth and the progress we've maintained across our projects, where margins typically enhance as projects mature. We achieved a $485,000 decrease in total operating expenses, including other one-time expenses, through an operational optimization plan that was implemented gradually throughout 2023. R&D expenses amounted to $3.1 million, a decrease of $300,000 compared to the previous year, which indicates a maturation of a new technology launch in the beginning of the year and optimization of cost structure. In addition, sales and marketing expenses amounted to $2.2 million, a decrease of $460,000 compared to the previous year. Moreover, the general and administrative expenses increased by $275,000, reflecting team expansion in the U.S. as we increased our focus in that region. The company had an operating loss of $3.3 million versus an operating loss of $6 million, resulting in a significant increase in our gross profit as well. The company's EBITDA improved by 2350% to $4.8 million compared to $0.2 million, reflecting the benefits of operating leverage associated with higher revenues, deploying new IoT projects and continued progress on the stages of our ongoing projects. This achievement underscores our focus on sustained growth and profitability. Our GAAP net loss improved to $4 million loss compared to $7.7 million loss, and our non-GAAP net profit improved by $5.5 million to $3.2 million compared to $2.3 million loss in the former year. Positive non-GAAP EPS was positive $0.47 compared to negative non-GAAP EPS of $0.61 in the former-year period. Our cash and cash equivalents and restricted cash balance at end of 2023 was $5.6 million, compared to $4.5 million at the end of 2022. As noted, we continue to improve our operating cash flow significantly from an operating cash used of $9.4 million in 2021 to $4.7 million in 2022 and to only $2.4 million in 2023, decreasing our cash use by 75% in the past few years alone, reflecting positive cash generation from new and old projects. New projects sometimes require cash upfront for manufacturing and equipment, but they shift into cash flow profitability throughout the life of the project. Also, lastly, we completed a successful close of a $2.9 million public offering to support the company's continued innovation and growth initiative, a testament to the investment community's trust in our vision and strategic trajectory. In addition, the company had one-time expenses of $2 million, mainly pertaining to the legacy business allowance for doubtful debt. In closing, we're excited about the growth we're experiencing and about the growing demand for our products. After several years, through which we transitioned from our legacy business to the IoT tracking of offenders business, we're happy to see the shift of rapid growth in revenue and profit. We believe that we're well positioned for continued growth by capitalizing on many opportunities that are 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 electronic monitoring industry, the growing public policy shift to monitoring instead of incarceration, and the growing adaptation of domestic violence prevention solutions. We anticipate sustained growth by further expanding our market share in the U.S. and Europe. Our commitment to preserving our technological advantages and our robust growth foundation remains steadfast as we continue to invest in these areas and hope to continue to grow accordingly. With that, I'll turn the call over to the operator to open up for questions.

Matthew Galinko, Analyst

Hey, thanks for taking my question, and congrats on a strong 2023.

Ordan Trabelsi, President and CEO

Thank you.

Matthew Galinko, Analyst

My first question is how does the pipeline look to you as we start 2024 compared to the pipeline at the beginning of 2023?

Ordan Trabelsi, President and CEO

The pipeline still looks strong entering the past year and this year. We have some projects we've already been on and some that were in late stages, like presentation stages, like contract negotiation stages. We have other projects that are in the pipeline as opportunities that we expect to bid on or achieve wins throughout the coming year or two. Things still look strong, and we've been executing well on the opportunities we had in front of us.

Matthew Galinko, Analyst

Got it. Okay. And I guess with the launch of the single piece products in the U.S. and I guess North America, I think that was the second half of 2023, how has the pipeline evolved in terms of geography? Is it kind of a stronger U.S. pipeline now? And obviously, I think, than a year ago, but how meaningfully has that changed the composition of the pipeline?

Ordan Trabelsi, President and CEO

So, in Europe, as we mentioned in the past, we continuously bid on national projects, and that would depend on the timelines of the different nations around Europe and the projects they have. So, we were dependent in a way on their timelines, and we were continuously bidding. We had a very high win rate of over 65%. This year, as we expanded more into the U.S., we're also looking at opportunities that are not necessarily at a large national level. We're also looking at counties and states. We're also looking at counties and states and resellers throughout the U.S. So, the pipeline in the U.S. is growing. We still have much work to do to grow the pipeline of the U.S. The actual market in the U.S. is three times that of Europe, according to market estimates. And we're starting off with the smaller projects, just like we did in Europe, we started off with Latvia and Lithuania, which were $100,000 projects. And so, they grew to projects like Finland and Denmark, which are $3 million to $4 million, and in Sweden, $7 million, and in Romania, $33 million. It's kind of like a ladder. You start smaller, attract, and then you go to the larger projects. And the U.S. was still at the earlier stages, but the pipeline of the U.S. has certainly been growing since we started expanding our focus on the U.S. market together with the PureOne product, which has already started to get rolled out and is receiving very good feedback from customers.

Matthew Galinko, Analyst

Got it. Thanks. And last question from me and I'll jump back in the queue. You mentioned the declining use of cash from operations over the last three years.

Ordan Trabelsi, President and CEO

The declining use of cash.

Matthew Galinko, Analyst

Do you anticipate a specific EBITDA figure that would bring you to breakeven? For instance, if 2023's EBITDA was around $5 million, do you expect that a figure closer to $7 million would achieve breakeven cash from operations, or is it more complex to determine given your current position in the project cycle?

Ordan Trabelsi, President and CEO

Yeah, it's a good question, but actually the EBITDA over time should reflect our cash use. So, for $4.8 million EBITDA, that should certainly reflect the cash flow positivity. The reason why you see the gap between cash flows and EBITDA is also mainly because of the timelines and the cash needs of projects. So, some of these projects probably have to manufacture a lot of equipment, and then the cash comes in over the years. So, that movement throughout the project creates this gap. But over time, things need to stabilize. And if we didn't have continuously newer and larger projects adding on to our recurring revenue base, we wouldn't see this gap. So, if things kind of stabilized on the same project for a while, you would see the cash flows go closer and closer to EBITDA. So, it's hard to give you a specific number because it depends on where, but it is good to know that EBITDA does reflect in a way a proxy for the cash potential creation of the company.

Matthew Galinko, Analyst

Got it. Thank you.

Operator, Operator

Thank you. We currently have no further questions on the line at this time, so I will pass the call back to Mr. Trabelsi for any closing remarks. Oh, sorry, we have, oh, no, I do apologize, sir. Continue.

Ordan Trabelsi, President and CEO

If we have any more questions, we can take them.

Operator, Operator

Okay. We do have a late question, sir, from an investor. Your line is live.

Unidentified Analyst, Analyst

Yeah, hi. Congratulations again on a great quarter and a great year. Question around your intellectual property. I see that you're using AI. Is that something you could patent in order to prevent other competitors from entering your market?

Ordan Trabelsi, President and CEO

Thanks, Jay. So, we do have in the company over a hundred different patents, and we've spent a lot of resources in the past on writing these patents. Lately, we've been so busy with our growth and our expansion that we haven't stopped as much to start writing new patents. Our AI capabilities do have unique applications to our specific market, and after we deploy them, we see their effectiveness. It's something that we consider if we want to utilize it like we've done in the past.

Unidentified Analyst, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Okay, I believe we have a question from Matthew Galinko again. Matthew, your line is live.

Matthew Galinko, Analyst

Oh, sorry, I didn't have any follow-up questions.

Operator, Operator

Apologies, sir. It was still on the line. Thank you. Okay, sir, we currently have no further questions at this time.

Ordan Trabelsi, President and CEO

All right. I'd like to thank all of you for participating in today's call and your interest in SuperCom. We wish you a happy Passover. Please contact us directly if you have additional questions. We look forward to sharing our progress with you on our next conference calls, filings and press releases. Thank you very much, and have a good day.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.