Earnings Call Transcript - SPCB Q2 2022

Operator, Operator

Ladies and gentlemen, good morning, and welcome to SuperCom's Second Quarter 2022 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 would now like to turn the call over to Stephanie Prince of PCG Advisory.

Stephanie Prince, Corporate Advisor

Thank you, Holly, 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 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 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 and non-GAAP financial measures 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 GAAP financial measure, please see the reconciliation table located in SuperCom's earnings press release. Reconciliations for other non-GAAP financial measures to 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, August 9, 2022. 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, and good morning, everyone. Thank you for joining us today. Earlier this morning, we issued a press release with our financial results for the second quarter of 2022. You can find a copy in the Investor Relations section of our website at supercom.com. We continue to maintain our commitment to timely quarterly reporting and for our quarterly review, I'll start with a brief update on our recent business highlights, strategy and Q2 results followed by a Q&A session. The second quarter was another good quarter for SuperCom; we won several important contracts in the U.S. and Europe, and we're excited about the reception and early traction of our newest product, the Pure 1, a highly innovative one-piece GPS tracking device. I'll go into more details in a few moments. For those new to SuperCom, since our founding in 1988, SuperCom has always been a trusted partner, providing cutting-edge electronic and digital security solutions to dozens of governments worldwide. As part of our mission, we strive to revolutionize the public safety sector worldwide through proprietary electronic monitoring technology, data intelligence, and complementary services. Our strategy has always been to lead with our technology and in 2022, we continued to invest in research and development to ensure our products remain the most competitive in the market. We continue to introduce new features and technologies into our proprietary platform, extending our lead in the marketplace. Our R&D teams continue to innovate and disrupt the status quo, whether it's new features, biometric capabilities, battery life, communications capabilities, or entirely new solutions for domestic violence, alcohol monitoring, and smartphone electronic monitoring within dense, hard to monitor urban areas and subways. In recent years, we've become more and more aware of the immense challenges that nations and governments worldwide face when dealing with their offender population. First, many countries suffer from high recidivism rates where persons relapse into more criminal behavior after finishing their sentence, which clogs the criminal justice system. Second, prison overcrowding is one of the key contributing factors supporting prison conditions worldwide, resulting in prisoners sleeping in shifts on top of each other or sharing beds. Third, in 2022 about $80 billion were spent in the U.S. to keep roughly 2.3 million people incarcerated, nearly 1% of the entire U.S. population. Beyond that, societal costs of incarceration, such as lost earnings and adverse health effects, are estimated to be three times these direct cost figures. Unfortunately, these issues aren’t unique to the U.S. and are prevalent globally. It is evident that prisons are far from ideal for solving the many challenges in criminal justice. To help meet these challenges, we have leveraged our technology and services, expertise in government security, and excellent team to focus on the public safety sector. We're seeing much success. And in just the past few weeks, we announced three additional new contracts across three different U.S. states, Texas, Southern California, and Idaho. Just this morning, we announced a fourth contract win, this time in the U.S. state of Kentucky. This is a great win for SuperCom, as this new partnership with a leading probation service provider facilitates our strategic expansion into the Southeast U.S. Furthermore, the recent win in Idaho represents our third win and third new customer in Idaho within a year, adding to our organically growing customer base and signaling just how rapidly our technology can spread to new adjacent customers. Alongside our expansion in the U.S., we have also recently announced two new contracts in Europe. We were awarded Croatia's First National Electronic Monitoring Project, which we have already launched, and we secured a new contract for Sweden's Juvenile National Electronic Monitoring Project. The third and final Romanian National EM contract in Europe is in Sweden, apologies. All three are currently held by SuperCom. Our strategy has been to build amazing technology, expand our presence, and deliver outstanding services. We believe that our growing success is based on these key factors, including our proprietary electronic monitoring technology, which scores very highly in competitive RFPs that support various programs such as house arrest, GPS monitoring, rehabilitation services, and more. SuperCom is awarded 40 new multi-year government projects since 2018. Our strong reputation and recognition as a premium provider of electronic monitoring technology and services contribute to our win rate as well. We operate in a small niche market, where customers know one another, and having a solid reputation is an essential factor in this business when selecting a vendor. Each customer won and project deployed enhances our transaction and reputation, making us even more competitive. In addition, we acquired an Electronic Monitoring and Criminal Justice business in 2016 named LCA, headquartered in Oakland, California, with a strong presence in the state since 1991. Through this acquisition and integration, the large reference-based relationships and experience we inherited in California have allowed us to enter the region with our new technologies and capabilities, effectively unleashing valuable synergies and launching it continues to renew multi-year recurring revenue projects. Since this acquisition, we have won over $25 million worth of new projects in California. We are now well positioned for growth in more locations and larger projects. Last, our strategic focus and management attention have shifted to our IoT tracking business with recurring revenues in developed countries. This coincides with the increased number of RFPs and procurement activity with potential government IoT tracking customers. This increase reflects the growth of the electronic monitoring market, which was valued at about $1.1 billion in 2020 and is estimated to reach $1.6 billion by 2025. The U.S. and Europe constitute about 95% of this market. In Europe, we have recently seen an uplift in RFP activity with over $200 million in upcoming project bid opportunities expected in the next 18 months. Broadly, we see a global trend of governments turning to innovative solutions, alternatives to incarceration to ensure public safety, and our Pure Security Technology Solution provides an effective way for institutions to enforce home confinement while easing overcrowding in prisons. In addition, it allows them to significantly reduce the associated costs of housing an inmate. For example, the total daily cost for monitoring an offender on home confinement or GPS monitoring is approximately $10 to $35 a day, substantially lower than the $100 to $140 a day cost at a correctional facility. More importantly, home confinement has been shown to reduce recidivism, highlighting its effectiveness in helping offenders improve their lives and making communities safer. The demand for offender electronic monitoring solutions is growing as it solves most of the mentioned challenges. Throughout the year, we have announced many new project wins, some in the U.S. and some in Europe, where we have been continuously displacing common offenders with an over 65% win rate in the European competitive RFPs. We are proud to have won so many new contracts in such a short period, especially in times of uncertainty and volatility in the market due to the looming charter recession and unstable geopolitics. Our business is recession-resistant in nature. And as the possibility of a potential recession increases, we have multiple tailwinds to support resilience and growth in our business and market. Entering 2022, we continue to strengthen our operational infrastructure, grow our workforce, and maintain our leadership in technology. For example, amidst the ongoing instability in the global economy in the past few months, we successfully finalized the development of a new product, the Pure 1, which we mentioned earlier. In addition, we owned our business plan, secured new contracts, and raised the needed financial resources to support our company during the time of volatility and uncertainty in the capital markets. We've also invested a lot of thought and time into our corporate culture and are proud of the high quality of our employee base and high retention rates. We pride ourselves on our ability to retain valuable engineering staff while facing competition from some of the largest global tech companies in the world, including those based in Tel Aviv. We grew our R&D team significantly in the past year. We have also strengthened the company's global sales division, recruiting a new VP of Sales and several sales managers with industry experience as we continue shifting from passive bidding to an active outreach sales strategy. We continue to invest in our R&D division, including new experienced engineers, product managers, quality assurance, and support personnel to serve the growing government customer base for our leading state-of-the-art technology. These investments have driven increased activity with existing customers and numerous new demos and evaluations of potential new clients. The new wins and our improved sales team are the first steps in executing the company's U.S. market expansion strategy. We also consider strategic acquisitions of resellers in key locations as part of our growth plan. We believe there's an opportunity to enhance our growth in the U.S. through the strategic acquisition of local electronic monitoring service providers that have developed a strong reputation and customer base in their respective local communities. We constantly monitor the market for potential acquisitions that could generate significant value by immediately expanding market presence and providing vertical integration synergies. An example of this strategy is reflected through our $3 million acquisition of LCA in California in 2016 and the significant strategic value and new project wins that have provided us. Turning to the financials, as we mentioned before, we are dedicated to a transition away from the legacy business to our new focus on the IoT tracking business that serves public safety, government customers in developed countries. With every quarter that passes, we get closer to achieving our goal and expect this to be reflected in our annual financial results by the end of the year. Nevertheless, while still going through this transition process, we were able to demonstrate stable performance and we believe that we're well positioned for future growth from our IoT division. Last year for the first time in five years, we achieved growth in annual revenues, overcoming the decline of the legacy business. In the second quarter of 2022 as well, we were able to offset the decline in the legacy business with higher growth from the IoT tracking business, generating a total year-over-year and sequential quarterly revenue growth in Q2 of 2022. Since we only recently won the numerous projects I mentioned earlier, we expect the revenue from those projects to begin to contribute to our financial results in Q3, Q4, and quarters following. As a reminder, the legacy business was comprised of one-time project revenues in Africa and South America, which is a sharp contrast to the IoT tracking business in developed countries, which boasts better payments and collections that have recurring revenue of approximately 83% over the past few years. Revenue in the second quarter of 2022 was $3.2 million, a 4% increase compared with the corresponding period last year and a 5.5% increase compared with the first quarter of 2022. Again, this quarter our IoT division grew faster than the decline in the legacy business. Gross margin was 40%, compared to 58% in the second quarter of last year, which reflects the high transitional costs required with the deployment of new IoT projects ahead of the startup of the associated recurring revenue streams. Moreover, we are in the process of starting several new projects in different locations simultaneously. In addition, global supply chain disruptions have temporarily increased material and shipping costs, further impacting our gross margins temporarily. During the quarter, we increased our research and development spending by $340,000 and continued working on the development of new products and improving existing products, which keeps us at the edge of innovation and technology leadership in our space. Our sales and marketing expenses increased by $380,000 to support the company's new proactive growth strategy, while general and administrative expenses decreased by $370,000 as we continue to expand our management and global team. The company had an EBITDA loss of $721,000, compared to a profit of $684,000, reflecting the transitional costs associated with deployment of the new IoT projects ahead of the associated recurring revenue streams and the temporarily higher costs of material and shipping due to global supply chain disruptions. We ended the second quarter with $3.9 million in cash, which includes cash from approximately $4.65 million in gross proceeds raised in a registered direct offering with a single credit investor in March of 2022. We also successfully closed another small capital raise of $1.75 million in gross proceeds in July just last month. Despite the challenging market conditions, this cash provides us with the liquidity we need to continue investing in sales and marketing as well as R&D to drive revenue growth and expand our total footprint. In closing, with our strong presence and reputation in both the U.S. and European markets, we believe that we're well positioned for continued growth and capitalizing on new opportunities. Coupled with the countercyclical nature of our industry, public policy shifts to monitoring federal incarceration, and returning to post-COVID-19 levels of business activity, we expect these drivers to fuel our business growth going forward. A recent announcement of new contracts in Europe and the U.S. are compelling examples of our successful business plan execution in a vertical in which we have a strong presence and an excellent reputation. And with that, I'll turn the call over to the operator to open the call for questions.

Operator, Operator

There are no questions in queue at this time. There appear to be no questions in queue.

Ordan Trabelsi, CEO

Okay, 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, 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. Thank you for your participation.