Earnings Call Transcript - SPCB Q4 2022

Operator, Operator

Ladies and gentlemen, good morning, and welcome to SuperCom's fourth-quarter and year-end 2022 financial results and corporate update conference call. 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, Investor Relations

Thank you, Jenny, 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, 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, April 20, 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

Yes, thank you. Sorry about that. Thank you, Stephanie, and 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 year ended 2022. 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 Q4 and 2022 results, followed by a Q&A session. SuperCom had a great year in 2022. Annual revenues increased by 44% to $17.7 million, and the company reached a positive EBITDA in both the third and fourth quarters after years of investment in our leading IoT technology. We also improved our operating cash flow significantly from an operating cash use of $9.4 million in 2021 to $4.7 million in 2022, roughly half, reflecting positive cash flow generation from new and old projects. During the past year, we won several important contracts in the US and Europe, guided over $40 million in total. And we're excited about the opportunities we see ahead. I'll go more into details in a few moments. To those new to SuperCom, SuperCom's mission is to revolutionize the public safety sector worldwide through proprietary electronic monitoring technology, data intelligence, and complementary services. Over the past 34 years since founding in 1988, we've been a trusted partner of dozens of governments worldwide, providing them with cutting-edge electronic and digital security solutions. Our strategy is to deliver technology with our top-notch solutions, expand our presence, and deliver outstanding services. We successfully executed that strategy by focusing on the following key factors. Our proprietary real-time monitoring technologies score highly in competitive RFPs and support 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 in 2018. Just in the past year alone, the announced project wins valued at over $40 million. Our strong implication and recognition as a premium provider of electronic monitoring technology and services also contribute to our win rate. With each new customer win and project deployment, we further strengthen our reputation and competitive position. Third, we managed a 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 roughly $2.1 billion by 2026, up from $1.2 billion in 2021. The US and Europe constitute about 95% of the market. In Europe, there's recently been an increase in our peak activity, with over $200 million of project bid opportunities in the past 18 months. Although these exceptional opportunities have resulted in a growing pipeline of business, that has an average of high recurring revenue rate after installation. In 2022, 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 to our proprietary platforms. As a result, we successfully finalized development and deployment of two new products, one, which is called PureProtect, a life-saving domestic violence monitoring solution. This calibrated product has undergone rigorous testing and has already been successfully implemented in multiple projects, including the $33 million project in Romania. Thirdly, expanding the company's addressable market. Another new product that was launched this year is PureOne. It's an all-in-one ankle bracelet monitoring solution that integrates comprehensive monitoring capabilities into a single device with lightweight design, longer battery life, high precision, and future-proof features. PureOne offers a more efficient and effective electronic monitoring solution, and this product also expands SuperCom's market reach to a sector that favors a one-piece solution, such as many regions in the US. We've been very pleased with its early reception and traction of our newest products and expect them to facilitate the rapid expansion of SuperCom into the US market. In 2022, we not only maintained our technological advantage, but also invested in enhancing our operational infrastructure and expanding our workforce. Furthermore, we bolstered 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 strategy. Throughout the year, we announced many new project wins in the US and Europe. We're super proud to have continuously displaced incumbent vendors with over a 65% win rate in European competitive RFPs. We're proud to have won so many new contracts in this short period, 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, there are 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% or more, prison overcrowding of over 100%, and high incarceration costs. In 2020, the US alone spent over $80 billion on approximately 2.2 million to 2.3 million people incarcerated, which equates to nearly 1% of the entire US population. For those reasons, among others, we see a growing global trend of the government turning to innovative solutions and alternatives to incarceration to ensure public safety, and our PureSecurity technology solutions have 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 through electronic or GPS monitoring is approximately $10 to $35 per day, 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, which align 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. SuperCom now does business in over 10 countries across Europe, and we look forward to increasing that number in the years ahead. Revenue for European countries increased by 230% to $9.6 million from $2.9 million in 2021 and accounted for roughly 54% of our sales mix in 2022. We won the largest industry award of the year for a national electronic monitoring project in Romania, guided at $33 million. It includes about 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. The project involves 15,000 monitored offenders per month over six years. Just a few weeks ago, we announced that we have received a $7.1 million follow-on order, a second order under the contract, which follows the initial order of over $8.1 million back in 2022. We've also launched a domestic violence solution in other regions of Europe and are planning to launch in the US soon. In Israel, there's potential for a new domestic violence project as well, as the government is trying to pass a law requiring domestic violence offenders to be monitored with technology such as ours. Finland was one of the most recent projects launched. The $3.6 million national traffic monitoring project was awarded by the national government to deploy SuperCom's PureSecurity electronic monitoring suite. Earlier this year, we also won contracts in Sweden and Croatia. SuperCom was awarded Croatia's first national electronic monitoring project, which we have already launched. We also secured a new contract with Sweden's juvenile national electronic monitoring projects, the third and final remaining national EM project in Sweden, which are now all held by SuperCom. We've also been working to increase our business in the US. We're proud to have made good progress towards our goals of multiple projects in California, Idaho, Texas, and Wyoming during 2022. For example, in the fourth quarter, Leaders and Community Alternatives, or LCA, our wholly owned subsidiary based in California, won a new project contract valued at approximately $4.25 million with the Northern California counties to provide adult re-entry services. LCA has provided services in these counties for many years, including adult day reporting services and electronic monitoring. The new project expands the scope of the contracted re-entry services 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. This program was already launched in Q1 of 2023. The recent win in Idaho marks our business's third win and third new customer in Idaho in less than a year, contributing to our organically growing customer base. These wins also clearly illustrate how rapidly our technology can spread to adjacent new customers. SuperCom now does business in multiple US states, with US revenue now accounting for 39% of our sales mix in 2022. Also, in the fourth quarter, SuperCom's data protection and security subsidiary, called Safend, received two orders totaling approximately $870,000. The first is valued at $270,000 from a government security agency to renew and expand their cybersecurity protection programs. The other is valued at $600,000 for license fees for additional seat expansion and recurring maintenance fees for our 50,000 seats. Safend's high-margin products have been around for years and have a promising outlook ahead. The rapid advancement of digital technology has led to an alarming rise in cybersecurity threats, making cybersecurity solutions more crucial than ever before. As a result, Safend's products are in high demand as they offer effective protection against cyberattacks. Our new strategic sales team and recent wins have been the first steps in executing the company's US market expansion strategy, and have already driven increased activity with existing customers and numerous new demos and evaluations in new potential ones. As we talked about before, we believe there is 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 and 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, acquired at less than one times revenues, but with very strategic synergies on top line and cost-effective. This LCA acquisition has led to over $30 million in new projects in California alone since the acquisition. I'll now turn over to the financials. During our previous conference call, I mentioned that we were anticipating contributions to our financial results in Q4 from the projects we discussed. I'm delighted to share that our revenue has recorded a remarkable year-over-year growth of 69%, amounting to $5.1 million in the fourth quarter. Moreover, our annual revenue growth increased by 44% to $17.7 million in 2022, with our IoT division being the primary growth engine. To put things into perspective, while the global electronic monitoring market growth was 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 the market prefers our solutions over alternatives. Furthermore, we are proud to announce our return to positive EBITDA in the third and fourth quarters, achieving an EBITDA of $400,000 in the third quarter, and $770,000 in the fourth quarter of 2022, resulting from targeted spending and high year-over-year increases in revenue. Revenue from developed countries continues to increase, reflecting the completion of our transition plan to transform our business from unstable emerging countries to developed countries. As a reminder, the legacy business comprised one-time project revenues in Africa and South America with sometimes hard collectability attempts, which sharply contrasts with the IoT-attractive business in developed countries that generates high recurring revenue, high collectability, and high predictability with multi-year government contracts. Gross profit increased by 3% to $6.4 million compared to $6.2 million the previous year. This decrease was concurrent with increases in the cost of goods, which resulted from supporting the launch phase of the mentioned new projects. Typically, in initial stages of projects tend to incur higher expenses, while the more advanced stages yield higher gross margins. As a result, our gross profit fluctuates depending on the composition of our project portfolio and the distribution of projects across these stages. Thus, a short-term decrease in gross profit accompanied by an increase in income can signify anticipation of long-term growth in gross profit, contingent upon the ever-evolving composition of our full project portfolio. Equipment purchases for the years ended December 31, 2022, and 2021 amounted to $524,000 and $946,000, respectively. It's worth noting that inventory from previous years was helpful in our business in 2022 as well. We increased our annual research and development expenses by $650,000. We continue to develop and launch new products and improve existing ones, keeping us at the edge of innovation and technology leadership in our space. In addition, our annual sales and marketing expenses increased by $1 million to support the company's new proactive growth strategy. General and administrative expenses increased by $1 million, as we continue to expand our management and finance teams. Our cash, cash equivalents, and restricted cash balance at the end of 2022 was $4.5 million compared to $4.6 million at the end of 2021. Our cash position is stable. We have credit facilities in place, and we reduced our cash needs as we continue to win and execute larger projects, as demonstrated in 2022, where our cash use decreased from $9.4 million to roughly $4.7 million compared to the previous year. In addition, the company experienced one-time expenses of roughly $1.1 million, driven mainly by reorganization expenses pertaining to legacy business and allowances for doubtful debts. The company had an operating loss of $6 million versus an operating loss of $6.7 million in the previous year. In closing, we're excited about the growth we are experiencing and about the growing demand for our products. After five years in which we transitioned from our legacy business to the IoT business, we finally see the shift to growth in revenue for the second year in a row, and we believe that we're well-positioned for continued growth by capitalizing on the many opportunities before us. This has been driven by multiple factors, including our strong presence and reputation in the US and European markets, the countercyclical nature of the electronic monitoring industry, the growing public policy shift to monitoring instead of incarceration, and the return to post-COVID business activity levels. 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. With that, I'll turn the call over to the operator to open for questions.

Operator, Operator

Thank you very much. Matthew Galinko, Maxim Group.

Matthew Galinko, Analyst

Thank you for taking my question and congratulations on a strong finish to the year and the growth we're experiencing. I want to discuss sales and marketing. I see that you have increased year over year for the full year, but the sequential trend shows a decline to the run rate from the end of 2021. I'm curious about the reasons behind this decrease in sales and marketing spending in the second half. Does this indicate a reduced investment in US initiatives, or is it still progressing vigorously?

Ordan Trabelsi, CEO

Great question. Let me just open up some of the financials from last year, because you're talking about comparison to the first quarters of 2021.

Matthew Galinko, Analyst

Yeah. Or even if you look sequentially from Q3 '22 to Q4 '22 or from Q2 '22 to Q4 '22, you'll see that step down over a couple of quarters.

Ordan Trabelsi, CEO

We are currently evaluating our sales and marketing strategies. The expenses in this area depend on the projects we secure, rather than being fixed costs typical of a standard sales team. Commissions are part of this, where winning new projects leads to increased commission payments for our sales teams. Additionally, there are costs associated with partnerships and collaborations. However, our sales and marketing expenses have been relatively stable overall. We have hired new salespeople, which has led to an increase in these expenses compared to the beginning of 2021 or 2020. We plan to continue investing in sales and marketing in both the US and Europe, while also seeking opportunities to optimize our costs, keeping in mind our aim for better profitability and reduced cash use. This trend of using less operating cash has been evident from 2021 to 2022, and we will maintain this focus as we expand globally.

Matthew Galinko, Analyst

Thanks for the information. I have a follow-up question regarding the last point. There was a strong performance on the EBITDA line in the second half of 2022, and revenue was also strong throughout the year. While I understand you are not providing guidance, can we reasonably expect to achieve EBITDA positivity in 2023?

Ordan Trabelsi, CEO

So we were EBITDA positive as you know as well, roughly $400,000 and $770,000 in Q3 and Q4. We try to maintain EBITDA positivity even though we are aware there's fluctuations because of the project nature of our business. So in Romania, Q3 and Q4, with the launch of the project, there's a lot of revenue associated with it. We announced another order of $7 million earlier this year in 2023. And that can create some fluctuations in revenues, as we saw between the quarters. Accordingly, that could create fluctuations in the EBITDA. So while the EBITDA could fluctuate between the quarters, when you look at an annual basis or over a long-term basis, we try to stay above zero to be EBITDA positive. As we continue to maintain more steady revenues and revenue growth, we will also look for additional pockets to optimize our expenses. We have the natural operating leverage baked in because we have the same fixed expenses for customer support, inventory management, and project deployment, whether it's a $30 million project or a $2 million project. As the project sizes grow, we're seeing improvements and growth in our potential contribution for each unit that's deployed. It's not yet reflected in the gross margins in the financials because we're at early stages of Romania, where the gross margins are lower because of a lot of installations and deployment of IT. But the projects will continue, and that will lessen the prevailing revenue mix. That will allow for an increasing gross margin for that project specifically. Based on how other projects will fall into the mix, we'll see how the gross margin evolves altogether as well as the EBITDA, which we hope to maintain positive, even though it's not a clear guidance. Because we're still more guided by our long-term goals to expand our market presence and get closer and closer to a leader position as a player in the EM market.

Matthew Galinko, Analyst

All right. Thanks. I’ll jump back in the queue.

Operator, Operator

Thank you very much. Matthew Galinko.

Matthew Galinko, Analyst

Hey, thanks. I wanted to ask about the competitive environment, particularly in Europe, where I know you've talked about some large opportunities in the pipeline. Has it intensified in recent quarters? Do you feel like you still have an edge to maintain the sorts of win rates you've seen in the last couple of years?

Ordan Trabelsi, CEO

Great question. Over the past few years, apart from our unexpected win in Romania, we've also secured new projects in Croatia. In addition to our ongoing projects, we are actively pursuing opportunities to replace competitors. New projects continue to emerge, and we often receive inquiries through local firms. We are viewed as a strong player with advanced technology and solid market momentum. Our IoT revenues have increased by 75% to 76% year-over-year, significantly outpacing the market growth of 10%. We remain strong in our applications, and our technology consistently performs well. While competitors may invest in R&D and new product development, we haven't faced significant technological threats. Our main challenge lies in displacing established players who have maintained their positions for long periods. The operational aspect of obtaining buy-in from companies for new technologies and processes is a significant hurdle for us, but we excel in having the latest features, capabilities, and performance metrics. We continue to innovate, launching new products like PureOne and PureProtect, which are leaders in the industry. Recently, two players in our field have merged, which could ease competition by reducing pricing pressures. They tend to submit two bids in contests, while we submit one, giving us a competitive advantage. Our new products, especially PureOne, are crucial in filling gaps in our offerings. In the US, many vendors focus on single-piece solutions, but they haven't yet included smartphone integration. Many judges in smaller regions are not yet familiar with this technology. To address this, we developed a one-piece solution that resembles the traditional design but incorporates enhancements like longer battery life, lighter weight, and mobile charging. This has strengthened our product competitiveness in sectors where we've had a long-standing presence, such as house arrest, GPS monitoring, and domestic violence, where we maintain a leading position.

Matthew Galinko, Analyst

Got it. And maybe the last question for me is a little bit of a two-part question. You mentioned continuing to invest in research and development and product. Do you anticipate that you'll have more products rolling out in the next year or two that could help you capture new customers or upsell to existing customers? Is that something that you could continue to grow customer spending on, if it makes sense to ask it that way?

Ordan Trabelsi, CEO

Okay. Yeah, we do expect to have new products and new generations of our existing products. It does depend on the projects that we win. For example, we won the Sweden Ministry of Justice project a few years ago, a $7 million project. They required inmate tracking in prison. So the same bracelet would track the felons while they're in prison, then when they go on holidays or weekends, sometimes to their families, we track them in the city outside the prison facility. In some areas, they wanted alcohol monitoring, where we monitor the alcohol in their blood. Here, they wanted domestic violence for Romania, which we had, and of course, we enhanced to support projects of such size, 15,000 offenders simultaneously, while also integrating new capabilities that we identified our customers were interested in from previous deployments of domestic violence around the world. So as we win more projects, we continue to evolve our platform. And that same evolved platform goes with us when we bid on other new projects. As you mentioned, we have many modules to offer. Some customers start with house arrest or GPS monitoring, or alcohol monitoring, or domestic violence, but then they expand into other capabilities. Because typically, once the government is running this kind of solution, there's no reason to limit themselves to only one program. There is no reason for someone on house arrest to remain at home if they can go to work and support their families and not pose a risk. So in this case, GPS monitoring could be a good option too. Some offenders are not even on house arrest; they're just under a domestic violence order. They can't be near the victim. So each of these programs, while they have different applications, fall under the criminal justice umbrella and are useful in different manners. Once we've deployed a platform, it's very easy to add additional products. The costs are lower, and the customer relationship is established. We've been doing this for 34 years at SuperCom. Even before we started focusing on tracking, back in the government identification space, we would do driver's licenses, then passports and visas. At some point, we even made efforts around payments and other solutions. So once we get our foot in the door, we aim to expand our offerings with additional modules. Over time, we expect certain customers will grow in revenue, and also new customers may seek a more holistic solution with additional capabilities, resulting in more savings, better security for their constituents and communities.

Matthew Galinko, Analyst

Thank you. For my final question, you mentioned that electronic monitoring has some countercyclical advantages. Can you share any specific examples from your discussions with customers, or insights from existing or prospective clients? Are municipalities and governments becoming more aware of the costs associated with not participating in an electronic monitoring program? Any details you could provide would be appreciated. Thank you.

Ordan Trabelsi, CEO

Yes. Well, first of all, as you mentioned, and we talked about this for a while, there's roughly 90% savings, such as the $80 billion spent operating prisons in the US in 2020 could have been reduced by $70 billion if they put everyone on house arrest. Not everyone is a good fit for house arrest, but a significant population of non-violent offenders fits perfectly into these programs. Furthermore, there is the government cost savings facet as well as the element of reducing recidivism. Individuals who go to prison sometimes become more adept at committing crimes. When they return to society, they lack the proper financial support and social integration, resulting in recommitting crimes with a high recidivism rate of over 75%. Various EM programs around the world have reduced that rate to 35%. Therefore, beyond the cost savings, there’s an overall enhancement in public safety. So when I mention being countercyclical, when economic conditions worsen, organizations seek to save costs. We've witnessed this trend with both corporations and governmental entities; they genuinely view monitoring alternatives as viable options. Other factors backing this up include a looming recession and its potential impact on low economic status communities, which inevitably leads to higher crime rates, ultimately creating an increased demand for tracking offenders. This presents us with a larger role to play in preventing crime and monitoring offenders.

Matthew Galinko, Analyst

Thank you.

Operator, Operator

Thank you very much.

Unidentified Analyst, Private Investor

Thank you. My name is Malcolm. First of all, I want to congratulate you on a great quarter and a great year. I wanted to ask if, after raising the money last quarter, you believe you have enough funds to continue running the business.

Ordan Trabelsi, CEO

Yes. Good question. On top of this, on the script and on the Q&A, we saw a negative cash burn from operations, cash use. In 2021, we had a $9.4 million cash burn. That has decreased to $4.7 million in 2022 because of these projects that generate positive cash flow. We expect Romania to continue generating positive cash flow, along with other projects in Sweden and Denmark. As we continue to add more projects, the positive cash flows from them would cover any fixed costs we have from being a publicly traded company, while also navigating recent world economic recessions. Thus, we expect to achieve cash flow positivity over time. Meanwhile, we raised some cash, and our balance remains good, allowing us to launch more projects and support existing ones for the near future. Over time, we aim to lower our need for operating cash support from the market. Our ability to do this will depend on the type of projects we launch. We have over $200 million in our pipeline, including some massive projects that may require working capital increases. If we plan to target projects exceeding $100 million, we will need additional working capital beyond what we have today. If that occurrence arises, we expect to manage our increased growth in working capital needs appropriately at that time.

Unidentified Analyst, Private Investor

Okay, great. Thanks. I have another follow-up question. Do you have any negotiations for acquisition targets in the market by big companies that want to buy you?

Ordan Trabelsi, CEO

So we are currently not on the shelf. We have not put ourselves out there for acquisition. We believe we have a good opportunity ahead, and we're aiming to capitalize on that before doing something like that. However, because we continuously capture wins against many of our competitors, there have been some vague discussions from various sources about potential interest in acquiring SuperCom. But this isn't something we've pursued extensively or focused on, as we remain dedicated to our current organic growth plans and prospects.

Unidentified Analyst, Private Investor

Thank you. I appreciate you taking my call and keep up the good work. Thank you very much.

Ordan Trabelsi, CEO

Thank you very much to you as well.

Operator, Operator

Thank you very much. Okay, Ordan. I think we have no more questions in the queue now. I can hand back over to you for any closing remarks.

Ordan Trabelsi, CEO

Thank you, operator. 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 or through our IR firm. We look forward to sharing our progress with you on our next conference calls, filings, and press releases. Thank you once again, and have a great day.

Operator, Operator

Thank you very much, everybody. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.