Earnings Call Transcript - SPCB Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the SuperCom 2020 Financial Results and Corporate Update Conference Call. At this time all participants are in a listen only mode. A webcast replay of the call will be available approximately one hour after the end of the call through July 30, 2021. I would now like to turn the call over to Scott Gordon, President of Core IR, the company's Investor Relations firm. Please go ahead, sir.

Scott Gordon, President of Core IR

Thank you, Hobart. Good morning and thank you for participating in today's conference call. Joining me from the SuperCom leadership team are Ordan Trabelsi, Chief Executive Officer. During this call, management will be making forward-looking statements, including statements that address SuperCom's expectations for future performance and operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in SuperCom's most recently filed periodic reports on Form-20F, and Form-6K, and SuperCom's press release last evening, 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 reconciliation of non-GAAP financial measures to net loss, it's most directly comparable GAAP financial measure. Please see the reconciliation table located in SuperCom's earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, April 30, 2021. 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 Ordan Trabelsi. Ordan, please go ahead.

Ordan Trabelsi, CEO

Thank you, Scott. On February 21 of this year, I began my new role as CEO for SuperCom after being with the company since 2013. Arie Trabelsi, our prior President and CEO, will continue to contribute to the company's success as a member of the Board of Directors. I'm excited to lead SuperCom and focus on the company's current initiatives to enhance shareholder value. In this new role, my focus is on growing revenues and expanding our customer footprint. Much of our investment will be in our IoT segment; we believe it offers the greatest opportunity given the market dynamics and our competitive capabilities. Currently, we have a high win rate in our project bids, over 65% year-over-year in the recent past. This is a result of outscoring our competitors with the help of superior technology. With every new project we win—whether it be in Sweden, Denmark, the Czech Republic, or many others—we continue to develop more cutting-edge capabilities and features for our technology suite. We will continue to lead with strong technology. We plan to start investing more in our sales and marketing teams to guide revenue growth. In recent years, our investment in sales and marketing has been minimal in IoT compared to our competitors. Additionally, beginning in the first quarter of 2021, we plan to return to reporting our results on a quarterly basis. We have invested in our finance department to improve the quality of our financial management and the timeliness of our reporting, providing more transparency to the street. Furthermore, in 2021, together with our enhanced cost division, new product offerings, and gradual release of COVID-19 limitations and restrictions, we are seeing increased activity in our target markets and are excited about the direction in which we are going. COVID-19 initially had negative impacts on our IoT business, and governmental agencies limited their operations; courts closed, leading to less use of our electronic monitoring devices for inmates. They moved to home confinement, and our active unit count decreased. However, due to the higher amounts of COVID cases in many correctional facilities, we saw a general industry trend toward the increasing use of home confinement as a way to address overpopulated prisons. This trend increased demand for our peer security electronic monitoring suite of products, particularly as those government agencies began to reopen. We expect this trend to benefit the segment in 2021 and in the coming years. In 2021, we're seeing growth towards pre-COVID active user numbers in many of our customer regions; we're also seeing increased RFP and bid activity as restrictions related to COVID-19 are gradually beginning to ease. We have been gaining significant traction in recent years. In both 2019 and 2020, we secured over 10 new multiyear government projects each, highlighting our value addition and setting the stage for increased recurring revenue in the coming years. Our primary focus is our IoT segment, which has been gaining traction addressing the two challenges directly and indirectly associated with COVID-19. First, in many areas, the COVID-19 outbreak has forced local authorities to reduce the prison population through a transition to non-confinement. Our pure security suite solution directly addresses this challenge with a comprehensive offender tracking platform that provides real-time electronic monitoring and tracking for national and municipal criminal agencies. By accurately and effectively tracking inmates, authorities can safely consign offenders while minimizing the risk of COVID spread in already overpopulated prisons. This solution not only enables the management of inmates at home but also reduces the cost of maintaining those that remain by providing a safer environment within the prison facility. During the second half of 2020, we won several contract awards validating the value of this technology. On September 3, 2020, we converted a pilot in the Caribbean into a new contract for our peer security suite or electronic monitoring and tracking platform. This solution ensures public safety by securing monitoring of offender location restrictions, providing a platform of tools that aid in the reduction of offender recidivism. On November 30, 2020, after a live pilot, we secured a new electronic monitoring contract in the state of Wisconsin for our pure security electronic monitoring suite. On December 1, 2020, we announced the launch of a $1.2 million five-year contract with the government of Latvia in Europe for national electronic monitoring, billed monthly, which provides a recurring revenue stream. This contract also includes our peer security electronic monitoring suite, which will monitor subjects under house arrest with GPS tracking. On December 3, 2020, we won a new juvenile electronic offender monitoring contract in the state of Alabama using our free track GPS solution, which is also billed as a recurring revenue resource based on daily usage rates. On December 7, there was a new electronic monitoring contract with the state of California with private companies serving these additional services markets and other electronic monitoring contracts. On December 9, we announced our work with the sheriff's office in the southeast U.S. for our pure track solution. Our pure health technology has also been in demand and has become an effective tool to implement quarantine measures to reduce the spread of COVID-19. In March of 2021, we launched a pilot using this solution with Israel's Ministry of Health to ensure traveler quarantine compliance. The pilot enabled people arriving in Israel the option of performing the quarantine for 10 to 14 days at home, instead of having to go to a specific isolation location or designated Corona hotel. In this program, 100 Pure Care or pure health devices were installed on non-vaccinated travelers who entered Israel from other countries to ensure compliance with government quarantine requirements. After the pilot proved successful, the Israeli government issued a competitive RFP for this project, which was awarded with an estimated value of $3 million per month in recurring revenues. The initial terms of the project are for three months, with an option to extend up to 36 months. We believe this project validates our pure health technology as an effective solution to fight COVID-19 and we are hopeful for continued momentum as other countries continue to combat the virus spread. Additionally, SuperCom's R&D department is focused on building the next generation of remote monitoring products, which are expected to be released in July 2021 and in the following years. These new products will enhance our overall solution and ensure we maintain our technology as a leader in this industry. We also have our supply chain capabilities. In order to support the increased demand for IoT products, we've adjusted our manufacturing capacity to enable more flexibility and scale up to 1,000 new units per day of production, which is a very high amount for our industry. Furthermore, we've made our global supply chain more resilient by reducing our dependency on specific suppliers and geographical regions in light of the difficulties faced in 2020 due to the COVID-19 pandemic. While our primary focus is on IoT segments, we continue to drive value through our security and cyber-solution segments. In fact, over the year, the security segment has completed more than 20 national government projects implementing electronic identification and biometrics for entire countries located in South America, Africa, Europe, and Asia. These projects provide SuperCom with a strong track record and an opportunity to win additional business after establishing a solid reputation and building sustainable relationships. Our revenues from these types of projects have shifted from being project-based and one-time in nature to a recurring revenue model. Our cyber-security solutions have continued to perform well, evidenced by a five-year $1.2 million contract won in December in Israel. These contract awards in the second half of last year and the corresponding recurring revenue provide strong momentum into 2021 while clearly validating the value of our product offerings. We are confident we will continue to build on this momentum. We've taken action in the second half of the year and beyond to strengthen our balance sheet. In July 2020, we closed a $3.2 million private placement with 2.4 million shares, and in February of 2021, we closed a $7 million subordinated note financing at a 5% coupon, providing us additional liquidity to execute on our business plan. In terms of financial performance in 2020, our revenue declined by 29% for the full year of 2020. This decline was primarily COVID-related, as many governmental agencies shut down, impacting our customers' ability to process prisoners to home confinement. As these agencies begin to reopen, we are seeing an increase in activity in 2021. During 2020, we focused on cost improvements and optimization to address the uncertainty related to the pandemic. Our gross margins improved from 39% to 47% in the prior year, primarily driven by improvements made to our services segment. We reduced our research and development spend by $1.6 million in 2020 or 24% of revenue down to 20% of revenue. Our sales and marketing expenses declined by $1.8 million in 2020, from 21% of revenue to 15% of revenue, and our general and administrative expenses declined by $1.2 million, although increasing as a percentage of revenue from 33% to 35%. Our cash balance at the end of 2020 was around $4 million. As we see economic conditions improve, we will invest in our sales and marketing to drive revenue growth. And with that, I'll turn the call over to the operator to open the call for questions.

Operator, Operator

Your first question comes from the line of Kevin Dede with Rodman & Renshaw. Please proceed with your question.

Kevin Dede, Analyst

Thank you, operator. Kevin Dede, H.C. Wainwright. Well done, congratulations on the new position. And thank you very much for taking my questions. I was hoping first, you could characterize your win rate. I mean, granted COVID, but I think you mentioned 20-odd IoT deals; can you tell us how many you won in '19 and how many you won in '20?

Ordan Trabelsi, CEO

We've won over 10 in each of the years for the amount.

Kevin Dede, Analyst

Okay. Could you give us a little more insight on the technological differences between pure health and pure care?

Ordan Trabelsi, CEO

Sure. Pure Care is part of Pure Health. It is focused on compliance. Pure Health also has anti-wandering capabilities and other solutions which serve the healthcare industry.

Kevin Dede, Analyst

Yes, sure. Pure Care is just quality compliance. Okay, got it. Yes. So just a little on the balance sheet, the short-term debt was up versus the last time we saw the balance sheet in June. And I'm just sort of wondering what the thinking is, and how you're managing the cash flow that you'll need to sponsor the initial rollout. Understand that there, when you get a new deal, they're a little capital intensive upfront.

Ordan Trabelsi, CEO

Right. You're correct. We launched new products in IoT, which require some cash for manufacturing the units, but after six to 12 months, those projects become cash flow positive. As you continue to win the projects, all projects generate positive cash flow. My hope is that the project sizes continue to grow, and then we will need to leverage external financing to support projects, like the one we just were awarded in Israel. Depending on stock price, we've been leveraging debt because we believe the company is undervalued and the stock does not represent our value properly, so you will see our debt levels raised in the future. We also plan to utilize equity to support the project.

Kevin Dede, Analyst

So does the $15 million represent the fortress loan?

Ordan Trabelsi, CEO

Yes, $15 million will be in balance.

Kevin Dede, Analyst

Okay. Yes, thanks for that. So the next question really has to do with revenue mix and sort of your strategic thinking—no mention, obviously, of e-gov or the software side of the business. And I'm just sort of wondering whether or not you could characterize their contribution in 2019 versus 2020 and how you're thinking about those business capabilities as SuperCom moves forward.

Ordan Trabelsi, CEO

Just a moment, I will get you those numbers, the breakout. One moment, please.

Kevin Dede, Analyst

Thanks, Ordan.

Ordan Trabelsi, CEO

Yes. So you will see our 20-F filed, and that will have these numbers. But to further clarify, our e-gov revenues were more or less the same from 2019 to 2020, from $1.925 million to $1.911 million, roughly $1.9 million. In IoT, the revenues went from $1.6 million in 2019 to $7.6 million in 2020. A lot of that contributed to a decrease in service revenues, which can only be provided when we have enough offenders to track because of repos in many parts of the US. Also, in the projects that we do have, we are unable to provide full service because people couldn't meet with us due to COVID restrictions. So while existing customers have stayed with us, the numbers went down due to existing limitations. Now that some restrictions have been alleviated, we're seeing those numbers bounce back, not yet to pre-COVID levels, but they are increasing in that direction. As for cyber-security, revenues went from $2.8 million in 2019 to $2.2 million in 2020.

Kevin Dede, Analyst

Okay. How are you, I guess, a big part of the question is really how are you looking at those other two segments? Understand, based on your prepared remarks, the focus is on IoT. Got that, clear. I'm just sort of wondering how you're looking at the other aspects of the business.

Ordan Trabelsi, CEO

Yes, we analyze the competitive landscape. The small note should have been filed already. But in terms of the competitive landscape, we've evaluated different divisions, and in IoT tracking, there's a market size of a couple billion dollars. Only 10 players have been able to generate a higher win rate and have the opportunity to reach marketing positions if we invest properly and execute. In other divisions, such as identification and cyber-security, it's a little more challenging. We do believe we can maintain our revenues and grow them. To talk about identification, we launched over 20 projects for governments around the world, including China, Tanzania, Panama, and Ecuador. These are national projects handling very sensitive data. We're providing these governments with our pure security and pure health solutions, demonstrating our ability to manage all this data, which builds trust with these large nations. It provides us with an excellent track record and helps us win more projects worldwide. The same DNA of serving national government customers supports us in maintaining healthy relationships, and we’re likely to have additional expansions and enhancements in identification. Opportunistically, we will bid on more projects as well, but we'll focus our capital resources more on IoT. For cyber-security, we have a very strong sales and distribution channel with many enterprise customers in the US and Europe, utilizing our technology for Endpoint Protection, protecting sensitive data from leaking out of laptops and endpoints for enterprises. Enterprises have to have a solution in today’s world, along with new solutions for advanced persistent threat protection and anti-malware protection, making it much easier for these enterprises to add components to existing solutions rather than bringing on a completely new vendor. We're trying to leverage that to grow our technology offerings to our existing customer base, not only to maintain high margin revenues but potentially grow them in the coming years with minimal investment.

Kevin Dede, Analyst

Perfect, thank you. We're done. One last housekeeping question. Can you give me the share count at year end, please? I couldn't find it in the press.

Ordan Trabelsi, CEO

Close to 20 million. Just a second please, 19.998 million; 19.999 million, if you round up.

Kevin Dede, Analyst

Okay. Yes, perfect. Thank you so much for entertaining my questions.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call over to Mr. Ordan Trabelsi for closing remarks.

Ordan Trabelsi, CEO

I want to thank you all for participating in today's call and for your interest in SuperCom. We look forward to sharing our progress on our next conference call. Thank you very much and have a good day.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a great day.