SuperCom Ltd. (SPCB) Q1 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning, and welcome to SuperCom's First Quarter 2023 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. I'd now like to turn the call over to Stephanie Prince of PCG. Stephanie, over to you.

Thank you, Matthew 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 may 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, May 15th, 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 of CEO, Ordan Trabelsi. Ordan?

Thank you, Stephanie. Good morning everyone. Thank you for joining us today. Earlier this morning, we issued a press release of our financial results for the first quarter of 2023. 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 highlight, strategy, and Q1 results, followed by a Q&A session. SuperCom had a great start to the year with a strong first quarter. We achieved record-breaking revenue of $6.4 million, representing a 109% year-over-year growth in quarterly revenue, marking three consecutive quarters of very high year-over-year revenue growth. This is the highest revenue figure we achieved in a single quarter since 2018. I'm thrilled with this outstanding performance and look forward to maintain its momentum in coming quarters. During the quarter, we executed advanced and various projects in our portfolio, such as the $33 million National EM project in Romania, utilized operating leverage and prime investments in our proprietary technology to achieve positive EBITDA for the third consecutive quarter. For those new to SuperCom, our mission is to revolutionize the public safety sector worldwide through proprietary electronic monitoring technology, data intelligence, and complementary services. Over the past 35 years, since our founding in 1988, we've been a trusted partners to dozens of governments worldwide, providing them with cutting-edge of electronic and digital security solution. Our strategy has been to deliver our technology develop top-notch solutions, expand our presence, and deliver outstanding services. We successfully executed our strategy by focusing on the following key factors. Our proprietary electronic monitoring technology scores highly in compared to our fees and supports 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 since 2018 and just in the past year alone, the announced launches in project valued at over $40 million. Our strong implication and recognition as a premium provider of electronic monitoring technology and services also contributes to our win rate. With each new customer win and project deployment, we further strengthen our reputation, technology offering, and competitive position. Third, with our 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 $2.1 billion in 2026, up from $1.2 billion in 2021. The US and Europe constitute about 95% of these market. In Europe, there's recently been an increase in RFP activity, with numerous new projects bid opportunities in the past 18 months. Altogether these exceptional opportunities have resulted in a growing pipeline of projects. Last year, 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 through our proprietary platforms. As a result, we successfully finalized development and deployment of two new products, one, is the life-saving PureProtect for domestic balance monitoring, which was successfully implemented in multiple projects, including a $33 million National EM project in Romania with a focus on [Indiscernible] domestic violence. The other is an on one ankle bracelet monitoring solution called PureOne. Both products have been well received and significantly expand the company's addressable. We are confident that both products will facilitate to put on potential into the US market. In recent quarters, we not only maintain our technological advantage, but also invested in enhancing our operational infrastructure and expanding our workforce. Furthermore, we've also 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 sales strategy. Throughout the year, we announced many new project wins in the US and Europe. We're super proud to be continuously displacing incumbent vendors with over 65% win rate in European competitive RFPs. We're proud to have won so many new contracts in such a short period of time, especially during [Technical Difficulty]

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Everyone, sorry, there was a technical error and call fell. Continue to where I left off. Sorry about that. Throughout the year, we announced many new project wins in the US and Europe. We're super proud to be continuously displacing incumbent vendors with over 65% win rate in European competitive RFPs. We're proud to have won so many new contracts in such 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 potential recession increases, we had 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%, prison overcrowding of over 100%, and high incarceration costs. In 2020, the US alone spent over $80 billion to keep approximately 2.3 million people incarcerated, which equates to nearly 1% of the 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 solution 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 confinement or GPS monitoring is approximately $10 to $35, compared to the much higher cost of $100 to $140 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 adoption of victim protection solutions worldwide, which aligns 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. As a result, SuperCom now does business in over 10 countries across Europe and we look forward to increasing that number in the years ahead. Last year, one of the largest industry award of the year for National Electronic Monitoring Project in Romania valued at $33 million, which includes up to 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 -- for over up to six years. Just a few weeks ago, we announced that we have received a $7.1 million follow-on order for this project, a second order under the existing contract, which follows the initial order of over $8.1 million. We've also launched a domestic violence solution in other regions of Europe and are planning to launch them in the US soon. In Israel, there's potential for new domestic violence project. The government is trying to pass a law requiring domestic violence offenders to be monitored with technology like ours. Finland was one of the most recent project launched in the first quarter of last year. The $3.6 million national -- monitoring project was awarded by the national government to deploy SuperCom's PureSecurity electronic suite. We're also been working to increase our US business. We're proud to have made good progress towards our goals of multiple projects in California, Idaho, Texas, and Wyoming in 2022. And fourth quarter, our subsidiaries -- our wholly-owned in California, called Leaders in Community Alternatives, won a new project contract valued at approximately $4.25 million. LCA has provided services in these counties for many years, including adult reporting services and electronic monitoring. The new program expands its 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. The program was already launched in Q1 of 2023. Our new strategic sales teams wins have been the first step in executing the company's US market expansion strategy and have already driven increased activity for existing customers numerous new demos and evaluations with potential new ones. And as we talked about it before, we believe there's also an opportunity to enhance our US growth and 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 for potential acquisitions that could generate significant value by immediately expanding market presence providing vertical integration synergies. Our acquisition of LCA in 2016 of $3 million, less than one-times revenues [Indiscernible]. The successful acquisition has proved to be a great strategic value for us with over $30 million in new project wins which has been generated in California. I'll now turn over to the financials. During our previous conference call, I mentioned that we anticipated contributions to our financial results in Q1 from projects we discussed. I'm delighted to share that our revenue has recorded a remarkable year-over-year growth of 109%, amounting to $6.4 million in the first quarter. This follows the 102% and 59% year-over-year revenue growth from two previous quarters Q3 and Q4 of 2022. To put things into perspective, while the global electronic monitoring market grew at approximately 10% in 2022, SuperCom's IoT revenues achieved a staggering 76% growth during the same period in 2022. This growth is a testament to the fact that our market prefers our solutions over the alternative. Furthermore, in 2022, we successfully returned a positive EBITDA and are proud to have maintained this achievement. For the third consecutive quarter, we achieved positive EBITDA and more specifically, we achieved an EBITDA of $0.4 million for Q1 2023, which resulted from targeted spending, operating leverage, and significant year-over-year increases in revenue. Gross profit increased by 19% to $1.6 million compared to $1.3 million before. This increase was concurrent with increases in cost of goods, which resulted from supporting the launch phase of the mentioned new projects. Typically, the initial project stage is usually to higher expenses, while advanced stages yield higher gross margins. Cause of fluctuations in our gross profit depending on project composition and deployment stages. A short-term decrease in gross profit was an income increase to indication long-term growth potential depending on project portfolio changes. Despite significant increases, our revenue from Q1 2022 to Q1 2023 by $3.3 million. We managed to maintain our operating expenses at roughly $2.6 million per quarter. So, while our revenues grew at $3.3 million, our operating expenses stay roughly the same, assessing once again, the strong operating leverage opportunities inherent in our business. As we deploy additional bracelets in regions or rerun existing projects, on our existing infrastructure, the contribution margins for each additional bracelet can be as high as 70% or more. Our net income in Q1 2023 improved to a $1.5 million loss compared to a $2.3 million loss in Q1 of 2022. Our cash, cash equivalents, and restricted cash balance at the end of 2022 was $3.9 million. The credit facility is in place and reduced our need for cash as we continue to launch new projects and progress on existing --. We will continue to invest in our sales and marketing as well as in R&D to drive revenue growth, expand our global footprint, and execute our business plan. In closing, we're excited about the growth we are experiencing and about the growing demand for our products. We're seeing very high year-over-year growth in revenues for the third consecutive quarter and believe that we're well-positioned for continued growth by capitalizing on many opportunities before us. These are being driven by multiple factors, including our strong presence and reputation in the US and European markets, the countercyclical nature of electronic monitoring industry, the growing public policy shift to monitoring instead of incarceration. 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. And with that, I'll turn the call over to operator to open for questions. Operator?

Certainly. [Operator Instructions] Your first question is coming from Matthew Galinko from Maxim Group. Your line is live.

Good morning. This is Allen Klee from Matthew Galinko. The first question I had was, can you talk about your strategy towards expanding the domestic violence solutions into the US market and the timing? And then also potential opportunity in the US with homeland security? Thank you.

Great, thanks for the questions. We started with the European market in recent years, also because of the proximity to Israel and a lot of our experience. But also because we developed very sophisticated products which had a good reception in the European market. Now, as we developed additional products such as the domestic bio solution, which is new in the industry and other players cannot provide or offer anything similar, we're able to expand into new projects in Sweden, in other countries in Europe, and also in Romania, which is just one of the largest projects in the field at $33 million last year. In the US, we've had a lot of demand from various retailers and counties and states for similar solutions. And using our domestic violence solution, super tech, we think we can get great traction in the US. We're currently in stages, both of the peer protected and the peer one were in stages in the US where various potential customers, retailers were trying out the solution. As we get closer to a full deployment, we expect to have potential expansion. Of course, into California, we have a strong presence, but also into many other states which we've been working before and new ones as well. We think there'll be good, great reception into the product and as we make the full adaption to the US market with these products, we expect good traction and good progress. That was the first question. In terms of homeland security, if you're talking about identification and biometrics like we've done in the past, our traditional business, our legacy business, identification, we've done projects for passports, drivers licenses, visas, and others. And in the US also, the company has won a project back in early 2000 around passport creation. But currently, our focus is on electronic monitoring. There are several projects in electronic monitoring as well, such as ICE, when they look at the border with Mexico, and there's also very large state projects in the US, and you see the numbers of the amount of offenders being tracked either at home or GPS monitoring or domestic violence growth every year. So we do expect opportunities in the US the market there is much larger than in Europe and as we expand from small counties to larger states and then potential federal projects we believe our technology will be a key factor in this expansion.

Thank you. Can you comment on the pipeline of large opportunities in Europe and potential timing?

What Europe, sorry?

Pipeline of large opportunities in Europe and potential timing for them?

So Europe, as we mentioned, there has been increased activity recently and we've been in on various opportunities. There are some very large ones that are still out. And we're waiting to hear answers for. It could be any week, it could be in the coming months. Sometimes these are out of our control and they're wasting time under the government. Last year, in the third quarter, we were awarded the $33 million national project in Romania. It's the largest project, it's the first project in Romania has done an electronic monitoring, the largest one in the industry awarded in Europe. We also had the first project for Croatia last year, awarded and there's some other ones in Europe that we're waiting to hear from and we're excited about as well.

Can you provide, help us understand the revenue recognition of the follow-on order from Romania?

Yeah, so the initial order was over $8.1 million and that was last year and we deployed it already and it will be received in Q1, follow on order $7.1 million, and that is expected to be delivered within the first two quarters of 2023 and accordingly, the revenue recognition as well for that order within that timeline.

So I'm sorry, was the revenue recognized already or it gets recognized in the first two quarters of 2020, or how does that work again?

The first $8.1 million were recognized, and now the additional order of $7.1 million additional, which we received in Q1, is to be delivered within the first half of 2023, and accordingly, the revenue recognition will be tied to the same timeline if the deployment is done as expected.

Thank you. What is your recurring revenue level?

A good question. In the past, it has been a little above 80%. In some of the recent quarters, this has been closer to 70% because of the remaining project, which has some large deployment components. But that's seen to fluctuate 70%, 80% depends on the project mix and revenue mix that's being incurred at the exact moment.

Thank you. So you made a comment of your expenses have been much slower growing than revenues. Is that something that you think you can continue as hopefully revenue continues?

Yes, certainly. We are operating structure here in Israel and the US. It's pretty stable. We can, with the same structure, we can support more projects and we can certainly support more units per project once we deploy it a project that's in Sweden or Denmark and Romania, the amount of additional units is very little additional work for us, because it all runs in the same infrastructure. And we have the ability to manufacture thousands of units really quickly, and that runs on our existing cost structure. So as revenues continue to grow as we hope and it will, our operating structure will grow much slower or operating costs will go much slower than the potential revenues and the gross margins could expand accordingly, especially when we add additional units in existing locations where we have deployments.

Thank you. Last question. You mentioned that you've been displacing incumbents in contracts. What is the reason why you've been winning from incumbents?

Great question. And in Europe, we've had over 65% win rate in much of the recent years. Typically, these projects are scored on various factors, one being the technology score. And on whether, not just how good technology is, but innovation, are you bringing something new to the table versus others, and we've done that consistently. We usually score very highly on technology and innovation. Furthermore, they want to see a track record, and we have a very large portfolio of experience in deployment over 50 projects in the last years, and a lot of them are recent projects, which are very relevant, and that gives us a very good score on that. Then, of course, there's pricing, timelines, and other things which -- which we're on par with other vendors. So we're on par in many of that requested items and then with technology score innovation, we do much better. We also have a smartphone model. We also have the smartphone resolution, because our bracelet has the longest battery life in the industry, it seamlessly works with the smartphone as well. We're able to offer a plethora of features through the smartphone, video calls, and authentication and tracking under the ground, and a variety of things that others cannot be for. And that also helps with domestic violence, where the offender is wearing ankle bracelet and the victim, through the smartphone, knows when they're coming close. So that's how we win most of the time, and we continue to enhance our solution and our proprietary offering. With every new project, we add more capabilities, and then we offer that going forward to new projects and new opportunities that we maintain advantage one step ahead of the rest in terms of our competitive position.

Thank you very much.

Thank you.

Thank you. At this time, we will pass the call back to Ordan for closing remarks.

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. We look forward to sharing our progress with you on our next conference calls, filings, and press releases. Thank you and have a good day.