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spk01: 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 on a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. 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 Advisory.
spk00: Thank you, Matthew, and thank you to everyone joining us. With me on the call today is Ordann Trebelsi, 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 more information about these risks, uncertainties, and factors, 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 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 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 this non-GAAP financial measure in a net loss, a 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 15, 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?
spk05: 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. The final copy in the legislation section of our website at triplecom.com. Today I'll start my comments with a brief update on a 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. It's the highest revenue figure we've achieved in a single quarter, since 2018, and we're thrilled with this outstanding performance and look forward to maintaining this momentum in coming quarters. During the quarter, we executed and advanced on various projects in our portfolio, such as the $33 million national EM project in Romania, utilized operating leverage and prior 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 partner to dozens of governments worldwide, providing them with cutting-edge electronic and digital security solutions. Our strategy has been to leave without technology, develop top-notch solutions, expand our presence, and deliver outstanding services. We've successfully executed that strategy by focusing on the following key factors. Our proprietary electronic monitoring technology scores highly and competitive RFPs, and supports various programs such as house arrest, GPS monitoring, rehabilitation services, domestic violence prevention, and more. Supercom has run over 50 new multi-year government projects since 2018. And just in the past year alone, we announced launches of new projects valued at over $40 million. Our strong reputation 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, to further strengthen our reputation, technology offering, and competitive position. Third is our strategic focus and attention to our IoT tracking business in developed countries, where the opportunity is the greatest. The electronics monitoring market is estimated to reach $2.1 billion in 2026, up to $1.2 billion in 2021. The U.S. and Europe constitute about 95% of these markets. In Europe, there's recently been an increase in our activity with numerous new projects that opportunities in the past 18 months. Altogether, these successes and opportunities have resulted in a growing pipeline of projects. Last year, we continued to invest in R&D to ensure our product remains the most competitive in the market and continuously introduced new features and technologies through our proprietary platforms. As a result, we successfully finalized the development and deployment of two new products. One is the life-saving PeerProtect for domestic violence monitoring, which was successfully implemented in multiple projects, including a $33 million project national EM project in Romania, with a focus on protection from domestic violence. The other is an all-in-one ankle brace and monitoring solution called Pure One. Both products have been well received and significantly expanded the company's adjustable market. We are confident that both products will facilitate superconductive expansion into the U.S. market. In recent quarters, we not only maintained our technological advantage, but also invested in enhancing our operational infrastructure and expanding our workforce. Furthermore, we've also accompanied 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've announced many new project wins in the U.S. and Europe, where Supercom has been continuously displacing incumbent vendors with an 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 economic
spk04: Ladies and gentlemen, if you wish to ask a question on today's call. Ladies and gentlemen, please remain on the line while we reconnect the speaker to the conference room. Once again, ladies and gentlemen, thank you for your patience. Please stay on the line while we reconnect the speaker to the conference room. Your line is now reconnected.
spk01: All speaker lines are now reconnected.
spk05: Hey, everyone. Sorry, there was a technical error and the call fell. It continues where I left off. Sorry about that. Throughout the year, we're announcing a new project in the U.S. and Europe where Supercom has been continuously displacing incumbent vendors with over 65% win rates. and European competitive RPs. But crowds have won so many new contracts in such a short period, especially during a conundrum of uncertainty amongst volatility due to the living threat of recession and unstable geopolitics. Our business is especially resilient in nature, and as the possibility of potential recession increases, we have multiple tailwinds to support growth. As many of you have heard, we described before, these global factors include high recidivism rates of roughly 75%, prison overcrowding of over 100%, and higher incarceration costs. In 2020, the U.S. A loan spent over $80 billion to keep approximately 2.3 million people incarcerated, which equates to nearly 1% of the U.S. population. For these reasons, among others, we see a growing global trend of government turning to innovative solutions and alternatives to incarceration to ensure public safety, and our peer security technology solutions have been designed to address those trends. Peer security provides an effective way for institutions to enforce home confinement or ease in prison overcrowding and to limit the result of income. For example, The total daily cost for monitoring an offender on home confinement or GPS monitoring is approximately $10.35, 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 ghost drivers, we have witnessed a surge in the adoption of victim protection solutions worldwide, which aligns perfectly with our strategic plan and the launch of our new product, TrueProtect. During the past year, we extended our business from across Europe by winning physically new contracts, which, as I mentioned, are typically awarded through a competitive RFP process. As a result, TIPICOM now does business in over 10 countries across Europe, and we look forward to increasing that number in the years ahead. Last year, we won the largest industry award of the year for a national electronic monitoring project in Romania, valued at $33 million, which includes up to 15,000 monitor vendors per month. Our domestic violence solution with Cure for Tactics is expected to enhance security of families and is part of the project for up to six years. Just a few weeks ago, we announced that we received a $7.1 million follow-on order for this project. The second order under this existing contract, which follows the initial order of over $8.1 million. We've also launched our domestic violence solution in other European regions and are planning to launch them in the U.S. too. In Israel, there's potential for a new domestic violence project. as the government is trying to pass a law requiring domestic violence offenders to be monitored with technologies like ours. Finland was the most recent project when launched in the fourth quarter of last year, 3.6 million national child monitoring projects was awarded by national government to deploy to become their security economy. We're also working to increase our US business. We're proud to have made good progress towards goals, multiple projects in California, Idaho, Texas and Wyoming in 2022. And In the fourth quarter, our subsidiary, a wholly owned subsidiary in California, called Leaders of Community Alternatives, won a new project valued at $4.25 million. LCA has provided services in this county for many years, including adult reporting services and electronic monitoring. The new program extends the scope of the contract to residential services, including jail-based sites and several community-based sites. It also focuses on residential services, including case management, substance abuse education, job preparedness, and economic risk reduction. The program is already launched in Q1 of 2023. Our new strategic sales team wins have been the first steps in executing the company's U.S. market expansion strategy and have already driven increased activity with existing customers and numerous new demos and valuations with potential new ones. And as we've talked about it before, we believe there's also an opportunity to enhance our U.S. 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 for 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, that's a one-times revenue, is a great example. The successful acquisition has proven to be a great strategic value for us with over $30 million in new project wins, which has been generated in California since. I'll now turn to the financials. During our previous conference call, I mentioned that we anticipated a contribution to our financial results in Q1 from projects we discussed. I'm delighted to share that revenue has recorded a remarkable year-over-year growth of 109%, amounting to $6.4 million in the first quarter. This follows 102% and 69% year-over-year revenue growth from the 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 IoT revenues achieved a staggering 76% growth during the same period in 2022. This growth is a testament to the fact that our market confers our solution over alternatives. Furthermore, in 2022, we successfully returned a positive EBITDA and are proud to maintain this achievement. For the third consecutive quarter, we achieved positive EBITDA and more specifically, we achieved an EBITDA of $0.4 million for Q1 2022. which resulted from targeted spending, operating leverage, and significant year-over-year increases in revenue. Gross profit increased by 90% to $1.6 million, compared to $1.3 million. This increase was concurrently an increase in the cost of goods, which resulted from supporting the launch phase of the mentioned new project. Typically, the initial project stages usually incur higher expenses, while advanced stages yield higher gross margins, causing fluctuations in our gross profit depending on project composition and deployment stages. A short-term decrease in gross profit was an income increase to indicate long-term growth potential depending on project portfolio changes. Despite significant increases, our revenue from Q1 2022 to Q1 2023 by $2.3 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 stayed roughly the same, affecting once again the strong operating leverage opportunities inherent in our business. As we deploy additional bracelets in regions where we run 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 equivalent, energy to cash balance, at the end of Q1 2023 was $3.9 million. With credit facilities in place, we reduce our need for cash as we continue to launch new projects and progress on existing ones. We will continue to invest in our sales and marketing as well as our R&D to drive revenue growth, expand our global footprint, and execute our business plan. In closing, we're excited about the growth we're experiencing and about the growing demand for our product. We are seeing very high year-over-year growth in revenues for the third consecutive quarter and believe that we're well positioned to continue growth by capitalizing on the many opportunities before us. These are being driven by multiple factors, including our strong presence and reputation in U.S. and European markets, the counter cyclical nature of electronic monitoring industry, the growing public policy shift in margin instead of incarceration. We anticipate sustained growth by further expanding our market share in the US and Europe. Our commitment to preserving our technological advantage and our robust growth foundation remains textiles as we continue to invest in these areas. And with that, I'll turn the call over to operator to open up a question. Operator?
spk01: Certainly. Ladies and gentlemen, if you'd like to ask a question on today's call, you need to press star, then the number 1 on your telephone. If you're using a speakerphone, please pick up your handset before entering your request and speaking on the call. If your question has been answered and you wish to withdraw your request, you may do so by pressing star 2. One moment, please, for our first question. Your first question is coming from Matthew Galenko from Maxim Group. Your line is live.
spk06: Good morning. This is Alan Clay, uh, for Matthew Galenko. Uh, first question I had was, um, can you talk about, um, your strategy towards expanding the domestic violence solutions in, into the U S market and the timing, and then also, um, potential opportunity in the U S with Homeland security. Thank you.
spk05: Great. Thanks for the questions. Um, Yes, we started with the European market in recent years, also because of 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-inclusion, which is new in the industry and other players cannot provide or offer anything similar, we were 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 U.S., we've had a lot of demands from various retailers and counties and states for similar solutions. And using our domestic violence solution at PeerProtect, we think we can get great traction in the U.S. We're currently in stages, both of the PeerProtect and the PeerOne, we're in stages in the U.S. where various potential customers, retailers, are 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 will be great reception into the product, and as we make the full adaption to the U.S. market with these products, we expect good traction and good progress. That was your 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, driver's licenses, visas, and others. And in the U.S., also, the company has won projects back in early 2000 around passport creation. But currently, our focus is on electronic monitoring. There are federal projects in electronic monitoring as well, such as ICE, and 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 grow every year. So we do expect nice 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 suspension.
spk06: Thank you. Can you comment on the pipeline of large opportunities in Europe and potential timing?
spk05: Do you repeat that?
spk06: Pipeline of large opportunities in Europe and potential timing for them?
spk05: So Europe, as you mentioned, there has been increased activity recently, and we've been bidding on various opportunities. There are some very large ones that are still out, and we're waiting to hear your answers for. It could be any week. It could be in the coming months. Sometimes these are out of our control, and they're based entirely on 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 that we awarded, and there's some other ones in Europe that we're waiting to give from and we're excited about as well.
spk06: Can you provide, help us understand the revenue recognition of the follow-on order from Romania?
spk05: Yeah, so the initial order was over $8.1 million, and that was last year, and we deployed it already, and then we received in Q1 a follow-on order of $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.
spk06: So I'm sorry. Was the revenue recognized already, or it gets recognized in the first two quarters of 2023? or how does that work again?
spk05: 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.
spk03: Thank you. What is your recurring revenue level?
spk05: Good question. In the past, it has been a little above 80%. Some of the recent quarters, this has been closer to 70% because of the Romanian project, which has some large deployment components. But it seems to fluctuate 70%, 80%. It depends on the project mix and revenue mix that's being incurred at the exact moment.
spk03: Thank you.
spk06: 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?
spk05: Yes, certainly. Our operating structure here in Israel and the U.S. is pretty stable. With the same structure, we can support more projects and we could certainly support more units per project. So once we deploy a project that's in Sweden or Denmark and Romania, the amount of additional units is a very good 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 they will, our operating structure will grow much slower. Our 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.
spk06: 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?
spk05: 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. Another, 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. And then, of course, there's pricing, timelines, and other things 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.
spk03: We also have a smartphone model. We also have the smartphone solution because our bracelet has the longest battery life in the industry.
spk05: It seamlessly works with the smartphone as well. We're able to offer a plethora of features to the smartphone, like video calls and authentication and tracking under the ground and a variety of things that others cannot before. And that also helps with domestic violence where the offender is wearing the ankle bracelet and the victim through the smartphone knows when they're coming closely. 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. So we maintain advantage one step ahead of the rest in terms of our competitive position.
spk06: Thank you very much.
spk01: Thank you. Thank you. At this time, we will pass the call back to Ordan for closing remarks.
spk05: I want to thank all of you for participating in today's call and for your interest in SuperCon. 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.
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