SuperCom Ltd. (SPCB) Q4 2020 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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.

Thank you, Hobart. Good morning and thank you for participating in today's conference call. Joining me from 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 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 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.

Thank you, Scott. February 21 of this year, I began my new role as CEO for Ordan Trabelsi after being with the companies 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 have the opportunity to lead SuperCom disclaims and focus on the company's current initiatives to enhance shareholder value. In this new role, focus on mines [ph] and companies to grow revenues expand our customer footprint. Much of our investment will be in our IoT segment, we believe it lies the greatest opportunity given the market dynamics and our competitive capabilities. Currently, we have a high win rate in our projects bids. Over 65% year up 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 Sweden, Denmark, Czech Republic, or many others, we continue to develop more cutting edge capabilities and features to 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. Whereas in recent years, our investment in sales and marketing was 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 and effort to improve the quality of our financial management and timeliness of our reporting, and we'll be 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 our negative impacts on IoT business, and governmental agencies limited their operations and courts closed for less use of our electronic monitoring devices from inmates. They moved to home confinement and our active unit count decreased. However, due to higher amounts of COVID cases in many correctional facilities given the challenges of maintaining proper social distancing in close quarters. We saw a general industry trend toward the increasing use of home confinement as a way to address overpopulated prison. This trend increased demand for our peer security electronic monitoring suite of products, particularly that those government agencies are being beginning to reopen. We expect this trend to benefit the segment in 2021 and in coming years. And in 2021, we're seeing the growth towards our free COVID active user numbers many of our customer region, we're also seeing increased RFP and bid activity, as restrictions related to COVID-19 are gradually beginning to ease [ph]. 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 add and also setting the stage for increased recurring revenue in 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 being able to accurately and effectively track inmates our authorities are able to safely consign offenders while minimizing the risk of COVID spread and already overpopulated prison. This solution not only enables the managing of inmates that are at home, but also reduces the cost of maintaining those that remain by providing a safer environment with a 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 pilot and the Caribbean into a new contract for our peer security sweep or electronic monitoring and tracking platform. This solution ensures public safety by securing monitoring offender location restrictions, providing a platform of tools that aid in the reduction of offender recidivism. On November 30 2020, after a live incentive pilot, we secured a new electronic monitoring contract in the state of Wisconsin for a 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 provide a recurring revenue stream. This contract also includes a peer security electronic monitoring suite, which will monitor subjects under house arrest with GPS tracking. On December 3, 2020, they want a new juvenile electronic offender monitoring contracts in the state of Alabama, using our free track GPS solution, which also billed as a recurring revenue resource based on daily usage rate. On December 7, there was a new electronic monitoring contract with the state of California with private companies serving these additional services market and other electronic monitoring contract. On December 9, we announced working with the sheriff's office in the southeast U.S each for pure track solution. Our pure health technology has also been in demand and became an effective tools 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 to 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 Corona hotel. In this case, designated Corona hotel. In the program 100 Pure Care or pure health devices embraces were installed on non-vaccinated travelers who entered Israel from other countries to ensure compliance with the governments quarantine requirements. After the pilot proved successful, the Israeli government issued a competitive RFP and was awarded the contract or awarded the tender with an estimated value of $3 million per month in recurring revenues. The initial terms of the project with the three months with an option to extend up to 36 months. We believe this project validates our pure health technology as an effective solution in fighting COVID-19 and hope for continued momentum as other countries continue to adjust the spread of the virus. Additionally, SuperCom R&D department is focused on building the next generation there are people monitoring products, which are expected to be released July 2021, and years to come. These new products will enhance our overall solution and ensure we keep technology as the leading one in this industry. We also have our supply chain capabilities. In order to support increased demand for IoT products, we've adjusted our manufacturing capacity to enable more flexibility and also scale up to 1000 new units per day of production, 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 strong track record an opportunity to win additional business after having established a strong reputation and build sustainable relationships. Our revenues and these types of projects have shifted from being project based and one time in nature to recurring revenue model. Our cyber-security solution safe and continued to perform well also 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 provides strong momentum into 2021 while clearly validating value of our product offerings. We are confident we will continue to build on this momentum. We've taken action in the second half and beyond to strengthen our balance sheet. In July 2020 because the 3.2 million private placement with 2.4 million shares and in February of 2021 because a $7 million subordinated note financing with a 5% coupon, providing us additional liquidity to execute on our business plan. In terms of financial performance in 2020, our revenue declined 29% for the full year of 2020. The decline was primarily COVID related, as many governmental agencies shutdown and that are impacting our customers' ability to process prisoners to home confinement, as these agencies are beginning 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 47% up to 39% 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% revenue to 20% of revenue. Our sales and marketing expenses declined by $1.8 million in 2020 or from 21% revenue to 15% of revenue, and our general and administrative expenses declined by $1.2 million. Although increasing the percent of revenue for 33 to 35%, or cashless with the cash balance at the end of 2020 was around $4 million. As we see economic begin to open back up, we will invest in our sales and marketing to drive revenue growth. And with that, I'll turn the call over to operator to open the call for questions. Operator?

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

Thank 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 sort of 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?

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

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

Sure. Pure Care is part of your health. It's required in time compliance, Pure Health also has anti-wandering capabilities and other solutions which serve the healthcare industry. That makes sense.

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.

Right. You're correct we launched new products in IoT, because we need to manufacture the units require some cash but after six to 12 months, those projects become cash flow positive. And as you continue to win the projects; all projects are generating positive cash flow. But I hope, of course, is the project size continues to grow. And then we will need to leverage external financing to help like this project that we just were awarded in Israel. So depending on stock price, we've been leveraging a lot of debt because we believe the company's undervalued and the stock represents the value properly. So you saw our debt levels raised in the future, and they also utilize equity to support the project.

So does the $15 million is that represents the fortress loan?

Yes. $15 million [ph] I'll say in balance.

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 a e-gov, or the software side of business. And I'm just sort of wondering whether or not you could characterize that their contribution in 2019 versus joining 2020 and how you're thinking about those business capabilities as SuperCom moves forward.

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

Thanks, Ordan.

Yes. So you will see our 20-F filed in that will have these numbers. But to further call, our e-gov actually say more or less the same the revenues from 2019 to 2020, from 1925 to 1911 as 1000, so $1.9 million, roughly in e-gov. In IoT, the revenues went from $1.6 million in 2019 to $7.6 in 2020. And a lot of that has contributed to a decrease in service revenues. And that's because a lot of ongoing services we can provide because we weren't getting as many offenders to track because of course repos in many parts of the US. And also in the projects that we do have, we can provide full service because people couldn't come and actually meet us because of COVID restriction. So the numbers went down with existing customers, even though we maintain the customers. And now when some of the restrictions have been alleviated, we're seeing those numbers actually jump right back up, not yet to the same levels pre COVID but they are increasing in that direction, which [indiscernible]. And in cyber-security the revenues went from $2.8 million in '19 to $2.2 million in 2020.

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.

Yes, we analyze the competitive landscape. Actually the small note that probably should have been filed already by the way. But in terms of the competitive landscape, we analyze different divisions and in IOT tracking, a couple billion dollars in market size, only 10, players were able to generate a higher win rate and have opportunity to reach marketing positions if we invest properly and execute. On other divisions in identification and cyber-security, a little more challenging, we do believe that we can maintain our revenues and grow them. Firstly, the talk about identification, we launched over 20 projects to governments around the world, including China and Tanzania, and Panama and Ecuador. And these are national projects with very high sensitive data. And we're able to show governments around the world now that we're doing pure security and pure health, that we're able to manage all this data, and received such trust from these large nations. It provides an excellent track record, and helps us win more projects around the world. So the same DNA of serving these national government customers, supporting them and interacting with them, as well as winning bids have stayed between identification to attract new offenders, it just the underlying technology is a little different. And we maintain the customers, we have to try to maintain the relationship with them and support them. And they order additional expansions and enhancements and identification. Opportunistically we will bid on more projects as well, but we will try to use our capital resources more towards IoT. In terms of cyber security, we have a very strong sales and distribution channel, we have many enterprise customers dragged U.S and Europe, which utilize our technology for Endpoint Protection, essentially protecting sensitive data from leaking out of laptops and endpoints to enterprises. Very important that enterprise has to have a solution in today's world it's also new solutions, advanced persistent threat protection and anti-malware protection, and it's much easier for these enterprises to add more components to existing solutions and to bring on a completely new vendor. So we're trying to leverage that and to add our technology offerings to existing customer base and not only maintain high margin revenues, but potentially grow them in the coming years with minimal investment.

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.

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

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

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call over to Mr. Ordan Trabelsi for closing remarks.

I want to thank you all for participating on 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.

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