SuperCom Ltd. (SPCB) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the SuperCom Quarter One 2021 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. A webcast replay of the call will be available approximately one hour after the end of the call through August 27, 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, Darryl. Good morning and thank you for participating in today’s conference call. Joining me from SuperCom’s leadership team is 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 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-20F, and Form-6K and SuperCom’s press release for the Company 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 reconciliation of these non-GAAP financial measures to net loss, its 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, May 27, 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. As you guys are aware, we had earnings call just less than a month ago for our 2020 results. So, I will keep it short and sweet. When I started my new role as CEO in February, I stated high level objectives and investing more in our sales and marketing to drive future revenue growth, and leveraging the increased scale to improve profitability over time. I also stated a plan to improve our financial processes to improve the quality and timelines of our financial reporting, and to begin reporting our financial performance on a quarterly basis. I am pleased to announce that for the first quarter of 2021, it’s the first time we have reported quarterly results since the first half of 2019. There’s a lot of effort invested by our team to get here, and we’ll work hard to make continued improvements to our financial reporting processes. Our investments in sales and marketing will be focused primarily on our IoT segment, which we believe has a significant opportunity ahead. Since the COVID pandemic began, we have seen several trends that we believe will drive future demand for IoT Tracking technology. First, as COVID began its initial spread, correctional institutions, many of which are already overcrowded, began seeing spike in infections, creating a risky environment for both, inmates and workers. As a result, we saw, in various geographies around the world, a dramatic increase in demand for electronic monitoring solutions that were being implemented to reduce the burden at correctional facilities, helping with overcrowding problem and minimizing COVID infection. An article published last time by Bloomberg cited that the number of prisoners wearing monitoring bracelets increased 25% to 30% since start of the pandemic. We believe the trends of increasing home confinement are not just temporary trends driven by the pandemic, but the beginning of a secular shift, that will increase the use of home confinement as one of the ways to punish offenders. We think there will be a change in policy of government to realize the benefits of this solution. Not only are they effective in controlling and helping with reentry of offenders, but they’re also cost effective as it significantly reduces the financial burden managing with the incarcerated population. As a result of these trends, we have seen increased activity in various governments looking to implement this solution. In September of last year, we signed a contract in the Caribbean for our peer security electronic monitoring solution. In November, we signed electronic monitoring contract in the state of Wisconsin. In December, we signed a contract with government of Latvia; and the state of Alabama, California and other state and the southern United States. And earlier this month, we won a new project in California valued at up to $4 million. We believe that can be -- we’re seeing just the beginning of a big wave of governments looking for effective cost efficient ways to address overcrowding, high cost of incarceration and the cycle of recidivism, where essentially why prisoners are incarcerated, at completions come out of prison and are likely to commit crime again where they’re back in, and this process helps to break that cycle. In addition to these home confinement solutions, the same technology enables us to offer effective quarantining solutions, which is our PureCare offering. This product enables governments to manage the spread of COVID-19 through self quarantine, by enabling government authorities to monitor movement of people that have been exposed to the virus travelling from other regions. The solution is able to track people’s location within buildings, vehicles and outside, and to verify if the person has maintained the home quarantine requirement, essentially will say if they met the 10, 14-day quarantine or not, without breaching into their private information. Since our launch, we have received significant interest and recently won an award with the Israeli government for a project with up to $3 million per month, once it goes live in the Ben Gurion airport, with initial term of three months. Our win rate when bidding on competitive electronic monitoring projects in Europe has been over 64%, a testament of our secure technology and our highly regarded reputation in the industry. We will continue to invest in our technology to continue to offer the best solution technologically on the market. It is important to note that the revenue generated from these contracts are primarily recurring in nature, as they are priced on per person per day usage, primarily during the term of the contract. This contract structure provides SuperCom revenue stream that is generally stable during the contract period. And in 2020, we shared that 82% of our revenues were steady state recurring revenues, as we call them, from projects past the deployment stage with repeat revenue. These trends provided significant opportunity for our IoT Tracking Solution segment. And as I mentioned earlier, we will be investing more in our sales and marketing efforts take advantage of it. Looking into our financials for the first quarter of 2021. Earlier today, we released financial reporting of our P&L and balance sheet updates for the first quarter of 2021. Because this is the first period of reporting results on a quarterly basis in a while, we don’t have a reported comparable year-over-year period to measure to. Our revenue in first quarter was approximately $3 million. We primarily represented our IoT Tracking segment, which has been our focus. Our gross profit in the first quarter was $1.7 million, which represents gross margin of 55%. Operating expenses were $1.8 million, resulting in operating loss of approximately $182,000. But, given numerous acquisitions in past years, our amortization expenses were significant, and non-cash. Our EBITDA for the quarter was approximately $650,000 positive. We secured additional subordinated debt this quarter, and our cash, restricted cash balance increased to $9 million at the end of Q1 2021, up from $4 million at the end of 2020. We also used some of the cash to pay down some of our accrued expenses and other liabilities. As part of continued efforts to strengthen our balance sheet, we converted from subordinated debt to ordinary shares as well. This helped reduce our net debt at the end of Q1 2021 in comparison to the end of 2020. We also invested in more inventory, to support faster deployment of new projects. And our working capital increased to $12.7 million at the end of Q1 2021 from $5.3 million at the end of 2020. And with that, I’ll turn the call over to the operator to begin questions and answers.

[Operator Instructions] Our first questions come from the line of Ronald [indiscernible] Capital.

Yes. Good morning. Ordan, you bring some good points about the COVID pandemic and how that is a significant impetus to your overall business. I wonder though, with all the travel restrictions, and as you pursue international contracts, has that -- the travel restrictions caused any sort of delays in terms of countries or municipalities or states looking at potential contracts? And if so, now that travel is starting to pick back up again, at least in certain regions of the world, if that is a potential catalyst for additional contract signings? Thanks.

Great question. We saw a lot of different forces work throughout the pandemic. Firstly, when the pandemic started, we saw a lot of nations looking to release from prison, they went to their existing provider of electronic monitors and then asked them if they could generate thousands more of units and quickly put them on. It was very hard, because it takes time to manufacture these units for us and any of our competitors. So, that created an initial spike, but it did slow down the general RFP activity, because of governments’ focus, traveling and other restrictions. So, we did see a slowdown last year. This year, we’re seeing an increase in RFP activity. We’ve been submitting more RFP -- more proposals to RFPs. We won an RFP in Israel for PureCare; we won RFP in California for a project up to $4 million. And also on the negative side, there’s various decreases in active counts in regions in the U.S. Last year in California, for example, a lot of courts were closed. So, we had a harder time getting more active clients, because they weren’t sending us potential enrollees to the program or house arrest. So, it’s a mixed bag. What we did see altogether, which is very interesting, is there’s been a lot more exposure to home confinement to tracking on people’s locations to understanding the value in house arrest and GPS monitoring. And a lot of governments are becoming more comfortable with the concept. So, while we already saw trend of growth, because people that have tried it -- government officials that have tried this over the years saw how effective and positive it is to get over the fact that technology is becoming better in the field of location tracking, and also just general policy shift to get people more and more out of prison and to help with reentry, not just with tracking, but also with employment services, with anger management and other required techniques that people need when they come out of incarceration. So, the general shift has already been there. And this gave it sort of a spike, the booster forward. And we’re actually looking at the electronic monitoring market together with the quarantine compliance market. And even though there’s a vaccine in many places right now available in the world, there’s still an important focus for governments to prevent variants and mutations of the virus entering their areas. Even in Israel, for example, there’s restrictions right now in 9 or 10 countries around the world to come back, for example, from India or Ukraine travelling to Israel, I believe. Even if you’re vaccinated, you still are required to do quarantine, given the risk of the variant of the coronavirus.

Okay. So, is it fair to say that over these next few months and quarters, you think the pace of RFPs may accelerate somewhat? And obviously, you guys have -- I think you noted 65% win rate, obviously very impressive, so. But, is it fair to say that you think that that RFP pace on a global basis might be picking up?

This year, we certainly saw an uptick in RFP activity and proposals that were put out compared to 2020. So, we’re seeing things pick up for various reasons, and that gives us more opportunities to win. In the industry, there is roughly 10 players who can provide technology, the very barrier to industry. Google or Apple can’t just come in one day and start bidding on these. Company has show 5 to 10 years of experience, doing exactly this tracking of offenders using the technology effectively, understanding all the complexities and challenges when deploying these kind of programs, and only then can we bid. And we alone in the projects we bid won over 64%, 65% in past years, which is great, considering the amount of players we’re competing against. So, as the amount of RFPs that come out increases, we think that gives us more and more opportunities to win. And a lot of it is just referrals from one country or one region to another, but more that people try our technology, they like the results, they tell their colleagues and other governments in similar roles, and then they come to us for various RFP or other procurement opportunities, sometimes an RFP is not required in various states.

Thank you. Our next questions come from the line of Zvi Rhine Sabra Capital Partners.

Hey. Good afternoon over there. I’m not sure you’d be able to give us the answer here, but any update on when the contract with Israel will proceed. In the media, it seemed like it was going to happen the first couple weeks of May, until the flare up occurred. Is there any updates subsequent to the ceasefire?

So, currently, we’re still in a similar state on the project. We worked on the initial integrations and some other elements required for the project. As we announced, we had a successful pilot. And then, when it came with large scale projects, the more integrations are required of various departments of the Israeli government. We’re waiting for an official go-live for it to go in Ben Gurion airport. And various political and geopolitical situations in Israel have held this up a little bit. We’re still waiting for the update. And we are ready with units and the technology integration to go live at that time.

Thank you. Our next questions come from the line of Spencer Kirschman with H.C. Wainwright. Please proceed with your questions. Spencer, can you see if you’re on mute, please?

Hi, Ordan. Sorry about that. I just want to see if you had the share count at the end of the quarter.

I don’t have that currently. We typically are filing six months in a year. As a foreign issuer, we have all equity statements and exact count. We started getting into quarterly now, and we wanted to get P&L and balance sheet. But, in future times we’ll have the exact shares.

Okay. And with the PureHealth project, are there any upfront costs? Any kind of volume that needs to be guaranteed?

Can you fine tune the question a little bit? What do you mean upfront costs and volume?

More so like cost to implement technology, things of that nature.

The underlying technology is one that we’ve been developing for many years for tracking of offenders. This is a very specific use case, we’re not actually tracking the location everywhere, we just find if they’ve been at home or not, so long they have bracelet on their arm -- on their hand here. And they’ve been at home for 10 to 14 days, we give a signal that they comply to the program. We don’t track any information, everything is deleted afterwards. A lot around sensitivity to privacy, these are not incarcerated individuals. And we have increased our production capabilities to be able to produce upto 1,000 units per day. That’s probably fastest in the industry by far. But our unique architectural solution and the fact that we can manufacture a lot of it in Israel helped us reach this level and this capability. We’ve manufactured and the government has given us estimates for what they believe amount of units will be. We manufacture accordingly, not the format, but just the head start, and we have the capacity for manufacturing very quickly, once this goes live. So, we have the initial quantities for the start, and then we will create more as we start to flow.

And are you able to give any guidance on future projects, kind of like an outlook on gross margin as well?

What, any guidance on future project gross margin?

On future projects, as throughout 2021?

You’re asking about…

And the pipeline.

So, the way these things work, as you can imagine, it’s kind of binary. We have a lot of RFPs that we bid on, and there’s only one winner for each RFP, basically. So, we don’t know what’s going to come through. We’re optimistic, in the last few years we won around 10 new projects every year. This year, we started announcing some wins or we expect to announce more wins, various sizes. And what’s interesting is, every time you have a win, that’s another reference. And initially you couldn’t bid on a lot of these projects, because we didn’t have the references required. They want this round many units or this many years. And now especially with projects like PureCare project in Israel, we have ability to deploy many units and use that as a reference and then win more and more projects.

Okay. It’s really helpful.

And this is interesting. We have won a lot of our projects based on our technology capabilities. We didn’t have a very big sales and marketing team, mainly bidding on RFPs with our technology at scores typically very high. Now, we plan to invest more also in sales and marketing. And we believe that together with our technology will allow us to continuously get a larger market position in the field, which is already a growing market. We think there’s a good potential there and we can get a stronger position.

One color on how you plan on expanding sales and marketing?

Very simple manner, actually, we had a very small amount of people work on sales and marketing, because we couldn’t support all the deployment with the management customers. Even when the RFPs now out there, it’s hard for us to produce at that speed. And our cash balances were low. We couldn’t invest in that fashion. Now, we’ve secured financing through various channels, as we described. We have a strong balance sheet. And this project is for example, in Israel, we would have never been able to do a year or two ago. Just the amount of cash required to manufacture all these units will not be possible. Now we can do that and we have capacity for bringing on more sales and sales support personnel to bring on more project which will bring on more use of cash in the short-term, because projects take cash for 6 to 12 months, but then generate very strong positive cash flow for the next years to come. Project’s usually five years or so until after 6 to 12 months you’re switched over to positive cash and generation.

Thank you. There are no further questions in the queue. I would like to turn the call back over to Ordan Trabelsi for any closing comments.

Thanks everyone for joining our Q1 2021 call. We look forward for sharing additional updates and having quarterly calls in the quarters to come. Thanks, again.

Thank you. This does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a great day.