SuperCom Ltd.
Q3 2021 Earnings Call Transcript

Published: 11 Nov 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the SuperCom Q3 2021 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through December 8, 2021. I would now like to turn the call over to Scott Gordon, President of CORE IR, the company's Investor Relations firm. Sir, please go ahead.

[Scott Gordon:]

Thank you, Kelly. Good morning and thank you all for joining 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 20-F and Form 6-K in SuperCom's press release that accompanies 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 it's 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, it's most directly comparable GAAP financial measure, please see the reconciliation table located in SuperCom's earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, November 11, 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.

[Ordan Trabelsi:]

Thank you, Scott. Good morning, everyone and thank you for joining us today. Earlier, we issued a press release and our financial results for the third quarter of 2021, a copy of which will be available in our Investor Relations section of our website. We are encouraged by our accomplishments in the third quarter which further demonstrate our continued execution toward our goals for 2021 and years to come as we strengthen our foundation for future growth with an emphasis on our IoT business and electronic monitoring of offenders. Our recent announcement of new contracts within California are exciting examples of our continued execution within a vertical which we have a strong presence and excellent reputation. We recently announced that are fully owned subsidiary, leaders and community alternatives or LCA which we acquired in 2016, was awarded a new project with probation department in Central Coast, California to provide rehabilitative services. This project which also has an emphasis on employment services for women to force those reentering the community from periods of incarceration by providing evidence-based and individualized services that contribute to reduction in recidivism. This new project is valued at approximately $1 million over the time of three years or approximately $340,000 per year and is expected to launch and start generating recurring revenue before the end of 2021. We also recently announced a new contract win in California to provide juvenile programming and rehabilitated services for out of custody juvenile programming which is another example of our continuing execution in vertical within which we have over a decade of expertise in serving. This project really supports those reentering the community from periods of incarceration by providing evidence-based and individualized services that contribute to reduction in recidivism. As we announced in August, this project is valued at up to $240,000 per year, starting with initial evaluation term of one year. After the first year, the government agency will consider expanding the project with longer-term scope. The project is already launched and is currently servicing clients in this county. On July 2021, we launched a new project in California, USA, valued up to $4 million over up to five years to provide juvenile programming and rehabilitative services. This project win was announced by a press release earlier this year. Our success in winning these new projects in California is a function of three factors

[Operator:]

And your first question is coming from Kevin Dede. Please pose your affiliation and your question.

[Kevin Dede:]

It's Kevin Dede at H.C. Wainwright. Hi, Ordan. How are you?

[Ordan Trabelsi:]

Hey Kevin, thank you. I'm good.

[Kevin Dede:]

So can we start with maybe the share count because that didn't show up in your press. Share count average for September? Do you have that somewhere?

[Ordan Trabelsi:]

Yes, it's in the press in the non-GAAP section and the share count is 26,234,102.

[Kevin Dede:]

Can we talk a little bit about the covenants associated with the long-term bank loan and how you executed that conversion from the agreement you had with Fortress.

[Ordan Trabelsi:]

We actually have not converted any of the debt we have with Fortress. It's still on our balance sheet. We have a sub-debt that we have been putting on through the quarter sometimes have the option to convert it or pay it down with equity?

[Kevin Dede:]

Okay. So the line that's $29.5 million, that's with Fortress.

[Ordan Trabelsi:]

That's a mix. That's roughly $16 million of Fortress and the rest of sub-debt. Also straight debt but we the company has an option to pay it down with issuance of equity which we do some time.

[Kevin Dede:]

Okay. So just to make sure that I have the new deals announced right, there have been four since the end of the June quarter. Is that right? four new deals and they have been implied.

[Ordan Trabelsi:]

So SINAN was announced right at the end of the June quarter, $3.6 million in value. And we launched at the beginning of July, a $4 million project in California. And we announced two new ones in California throughout the quarter. And one of those 11 has already launched and another one is expected to launch before the end of 2021.

[Kevin Dede:]

And then, the Finnish one, too, correct? That's new.

[Ordan Trabelsi:]

Sinan-1 was announced yes, right at the beginning of the quarter in June 29 or early July with the Finland $3.6 million project announcement.

[Kevin Dede:]

Okay. So can you compare the number of wins there versus the number of wins in the first half of the year?

[Ordan Trabelsi:]

I don't have that readily available right now. All the wins in front of me, just the ones in the recent quarter or so. But what we're seeing as described on the prepared remarks, uplift in activity for RFPs in Europe and the U.S. And so there was a slowdown throughout the pandemic. And lately, there's been more of a release. We're seeing a lot of RFPs in Europe. And as you might remember, our win rate in Europe has been over 65%. For most of the RFPs that we've been bidding on, thanks to our high score in technology. So now we've been bidding effectively in Europe and we've also developed a new sales team in the U.S. that are supporting our existing which was one salesperson we've been enhancing it into a full sales team with new offices out of Kentucky and they are currently doing 20 to 30 new evaluations with potential customers in different counties around the U.S. which we hope will turn into the projects as well beyond the things that we've announced in California and in Europe.

[Kevin Dede:]

Okay. You mentioned M&A opportunity. Could you characterize the U.S. market? I think you've talked to it before and you see it fragmented. Is that essentially the way it is?

[Ordan Trabelsi:]

Let me explain which is interesting. So the market itself, 2 billion is the highly varied, you can't bid on projects for tracking of offenders around the world if you don't have experience doing such and reference this logistics experience. So the manufacturers of the technology such as SuperCom are a handful, maybe 8 to 10 players around the world. Those are the ones that we see consistently when we're bidding on larger national project or if something that slides with State, California State of Florida or Texas. But when you look at the more county-level projects, a smaller one, they're very fragmented. You have dozens, not over 100 small providers, local service providers which serve the counties in the region, spread out throughout the U.S. and these local service providers are typically our customers in a way they leased out equipment from us or the other 8 to 10 players in the market and they provide the counties with full services. They provided technology but they also provide the manpower to put the braces on the personnel to where the reports and so forth. So, while we sell to these service providers sometimes, there are interesting opportunities to acquire them, just like we did in 2016. If we can get it at the right multiples in the right price, we can essentially expand our footprint immediately into more into new locations, digital reference base and also unleash significant vertical synergies by deploying our technology into their ongoing operations. Example was done in 2016 of LCA and we're keeping our eye out for more opportunities like that in the coming future throughout the U.S.

[Kevin Dede:]

Can you talk a little bit about e-Gov and your software, your safe development? How are you balancing investments in that versus the tech given tough resources.

[Ordan Trabelsi:]

So we're trying to manage our cash allocation strategies effectively. We continue to assess and optimize them every quarter. In the past, say, 2015, the majority of the revenues in the company were from electronic ID or e-Gov, nearly $30 million in annual revenues or from that space in Africa and South America. We made a strategic decision to shift away from that region of the world and focus on recurring revenues from developed countries in the U.S., Canada and Europe. And a lot of that is through our IoT tracking business and our cybersecurity business. So one project just rolled off in Africa, generating $300 million a quarter with high margins. And instead of reinvesting our cash to focus more expedite project but we prefer to use our cash for projects in IoT tracking where as we said, the niche market, we have a very strong position with our technology and we can leverage the cash to capitalize and grow our presence and continue to generate recurring revenues in developed countries. So VAD to begin this year is last year, it was close to $2 million annual revenue. It's down from 32 and now that's been declining further. And we've been countering that and also growing as a total revenue with the new wins in the IoT space. In terms of cybersecurity, we have $2 million in revenues annually with very high gross margins or selling software. We continue to maintain that with some investment in fiber but not to the same level and focus on cash investment as we have in IoT. For example, in the quarter, we invested a lot in purchasing more equipment to manufacture more places so that we're ready for larger projects, where there in Israel other places around the world.

[Kevin Dede:]

Okay. Just to make sure I add that clear, you're actually manufacturing, not outsourcing.

[Ordan Trabelsi:]

We manufacture the whole chain of factor in the process. Some of it is outsourced. The chip manufacturing and we design it here but we send it out. Other parts are done in-house. And then we have a full supply chain which involves third-party providers, manufacturers and our in-house teams.

[Kevin Dede:]

Okay. Last question for me. How -- what sort of progress you're making on finding a CFO?

[Ordan Trabelsi:]

Good question. We've actually invested more recent launches in our financial teams. And as you can see, we're back to reporting quarterly numbers as well as timely reports. We continue to search for a CFO and hope to have one in the coming future to finalize our investment on the financial department which we believe is important.

[Kevin Dede:]

Okay. And then which auditors did you settle on, Ordan? I lost track of that to that, apologies.

[Ordan Trabelsi:]

We're in the same orders for the last few years with an Israeli firm in Halperin and they've developed a familiarity with the company and that helps us with our reporting and our annual audit to be done in a more streamlined fashion. And then their understanding of our business very well and experienced in recent years.

[Kevin Dede:]

Great. Thanks so much for taking my questions, Ordan. Appreciate it.

[Ordan Trabelsi:]

Thank you, Kevin. Thanks.

[Operator:]

I would now like to turn the back over to Ordan for any closing remarks.

[Ordan Trabelsi:]

I want to thank all of you 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 and have a good day.

[Operator:]

Thank you, ladies and gentlemen. 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.