SuperCom, Ltd.

Ladies and gentlemen, good morning and welcome to Supercom's first quarter 2024 financial results and corporate update conference call. At this time, all participants are in 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. Joining me from Supercom's leadership team 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 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 6-K, 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 a reconciliation of this non-GAAP financial measure to 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, 2024. 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 floor over to Supercom's President and CEO, Ordan Trabelsi.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Earlier this morning, we issued a press release with our financial results for the first quarter of 2024. You can find a copy of it 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 highlights, 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 an eight-year record quarterly net income of $800,000, representing $2.3 million improvement year over year. We're thrilled with this outstanding performance and look forward to maintaining this momentum in the coming quarters. During the quarter, we executed an advance on various projects in our portfolio, such as the $33 million national EM project in Romania. We utilized operating leverage and prior investments in our proprietary technology to achieve a significant EBITDA increase of 400% year over year to a level of $2 million even though this quarter. For those new to Supercom, our mission is to revolutionize the public safety sector worldwide with our proprietary electronic monitoring technology, data intelligence, and suite of complimentary services. With over 35 years of experience since our founding in 1988, we've been a trusted partner to dozens of national governments worldwide. providing cutting-edge electronic and digital security solutions. Our strategic blueprint is straightforward yet powerful. Lead with innovative technology, develop superior solutions, expand our global presence, and deliver outstanding service. This strategy is backed by the following. Our proprietary electronic monitoring technology, which scores highly in competitive government tenders and supports various programs, such as house arrest, GPS monitoring, rehabilitation services, domestic violence prevention, and more. And since 2018, Supercom has secured over 50 new multi-year government projects. Our strong, growing reputation as a premium provider of electronic monitoring solutions and services enhances our market position with each new customer win. And our strategic focus on the IT tracking business in developed markets, where the opportunity is greatest. With electronic monitoring services, a market projected to reach $2.3 billion by 2028. The electronic monitoring market, the U.S. and Europe constitute about 95% of these markets. Altogether, these successes and opportunities have resulted in a growing project pipeline and substantial recurring revenue. Last year, we continued to amplify our technological leadership, which was significant R&D investments, leading to the launch of advanced solutions like PureProtect and PureWant. These offerings are already making headway in various markets, including the U.S., and are pivotal in Supercom's expansion. PureProtect is a life-saving domestic violence monitoring solution. This solution provides improved protection to families suffering from domestic violence. This innovative solution addresses domestic violence issues and further enhances the company's portfolio of products and services. PureOne is an all-in-one GPS tracking ankle bracelet monitoring solution that integrates comprehensive monitoring capabilities into a single device. Like many of our products, it offers top-notch features, placing it above competition in most metrics, such as battery life, weight, comfort, and more. So these two products, Pure Protect and Pure One, have been significant innovations which have helped us redefine and upheaval competitors and segments in the industry. Our cloud-based software enabled Pure Security product lines. has been particularly effective in monitoring domestic violence offenders and managing real-time information as well. The real-time advantage is a game-changer to the industry because it empowers authorities with actionable insights and timely interventions to mitigate potential risks and enhance public safety. These products have also been well-received and have significantly expanded the company's addressable market. We've been very pleased with the reception and traction of our newest solutions and expect them to help facilitate the accelerated expansion of Supercom into the U.S. market and further European countries. We've fortified our operational infrastructure to support our growth and have revamped our sales strategy with a proactive outreach approach. Our sales team, with deep industry expertise, has been instrumental in achieving new wins and driving growth. Over the past months, we announced many new project wins in the U.S. and Europe. Supercom has continued displacing incumbent vendors and achieved an over 65% win rate in Europe in competitive tenders over the recent years. Despite macroeconomic uncertainties and the ongoing Israel-Gaza war, Supercom's solutions are being increasingly relevant. Factors like high recidivism rates and the escalating cost of incarceration make our solutions not only cost-effective, but also essential for governments looking to enhance public safety and reduce costs. The company's peer security technology solution has been designed to address this trend, offering an effective way for institutions to enforce home confinement, ease prison overcrowding, and lower costs significantly. For example, the total daily cost for monitoring an offender on 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 the adoption of victim protection solutions worldwide, which aligns perfectly with our strategic plan and the launch of our new product, PeerProtect. In the European market, Supercom expanded its business in over 10 countries and secured significant new contracts, which are typically awarded through a competitive tender process. Besides winning new projects, we continue to execute and receive ongoing orders from our partners. Just about three weeks ago, we announced receipt of new orders valued at over $5 million from European governments. Thanks to our optimized and efficient production processes, over 50% of these orders have already been delivered. Last year, we secured a new national program with the Finnish government to deploy our domestic violence monitoring solution. The deployment of our peer security suite consisting of PeerProtect, PeerTrack, PeerTag, and PeerMonitor demonstrates the versatility and effectiveness of our solutions and underscores our leadership in the electronic monitoring space. Our collaboration with Finland is a prime example of the confidence that clients have in Supercom, as those who experience our services often choose to broaden their engagement with our diverse array of solutions. Notably, at the end of 2022, the company won the largest industry award of the year for national electronic monitoring project in Romania, valued at $33 million, including up to 15,000 monitored offenders per month for up to six years. During 2023, we announced orders valued at over $10 million from Romania's Ministry of Interior, further extending our engagement in the country's national EM project. This large-scale project reinforces the strength of our peer security suite and cements our position as a trusted partner for governments worldwide. We also launched our domestic violence solutions in other European regions and recently launched them in the U.S. Although Supercom already does business in multiple U.S. states, we are actively focused on further expanding our presence in the U.S., Our wholly-owned subsidiary, LCA, located in California, is actively expanding the size and scope of existing programs, winning rebids with existing customers, and winning new programs with new customers. The company strategically prioritizes Pure One's expansion into new markets and geographies. It has received high praise during its introduction into various regions of the U.S., where Pure One has been successfully deployed and is actively utilized to monitor live offenders. Moreover, Sales activities for Pure One have commenced in promising new markets outside Europe and North America. Our new strategic sales team and new wins have been the first step in executing the company's U.S. market expansion strategy and have already driven increased activity within existing customers and multiple new demos, resulting in a significant increase in the company's pipeline. Launching our Pure One solution in late 2023 was a significant milestone in our U.S. expansion strategy. we've already announced three new project wins in North America to provide the solution. The first, through LCA, we won a new project in California valued up to $2 million to provide a comprehensive program focusing on ranching services for all adult inmates. The award was a result of winning a formal competitive bid process. Moreover, LCA secured a new electronic monitoring contract in California with an established California services provider in the judicial sector. This contract is particularly notable for Supercom's successful displacement of a long-term incumbent vendor. Finally, Supercom won a new project in Canada with a renowned Canadian industry partner in the tracking solution sector. This project expands the existing collaboration with this long-standing partner, transitioning from providing RF-based tracking technology to embracing new GPS technologies. As I mentioned earlier, introducing our PureOne solution was a game-changer in securing these contracts. It underscores our competitive edge and commitment to delivering innovative and superior technology solutions. By securing these contracts, we further reinforce our position as a market leader. We review our recent wins as indicators of our growing influence and expansion potential in North America and worldwide. As we mentioned in previous calls, 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 local markets. We constantly monitor the market for potential acquisitions that could generate significant value by immediately expanding market for potential acquisitions and immediately expanding market presence and providing vertical integration synergies. Our acquisitions of LCA in 2016 for $3 million is a great example. Successful acquisition has provided to be a great strategic value to the company through which we won over $35 million in new project wins and it generated in California alone. I'll now turn to the financials. During our previous conference call, I mentioned that we anticipated contributing to our financial results in the subsequent quarters As our ongoing projects matured, I'm delighted to share we've substantially improved our financial and operating results. We've seen a gross profit margin increase by 123% to 55% from 25%. Moreover, we've sustained positive EBITDA in each of the last four years, 20 to 2023, and seen remarkable operating improvements as evidenced by a record net income of $800,000 this quarter, along with $400,000 EBITDA growth year over year to $2 million. This is driven by the significant growth in our company's revenue in the past few years, targeted spending, and operating leverage. This quarter's profitability metrics demonstrate how we can seize the high margin potential of our project portfolio through successful execution and progression in different stages of these projects. The following is a comparison between the financial results of first quarter of 2024 and the first quarter of 2023. Gross profit increased by 139% to $3.8 million compared to $1.6 million, which directs the outcome of the progress we've made across our projects where margins typically enhance as projects mature. Typically, the initial project stages incur high expenses, while advanced stages yield higher gross margins, causing fluctuations in our gross profit depending on project composition and deployment stages. As the project pipeline matures, we expect an upward trend in gross margins based on the evolving project portfolio. As we deploy additional bracelets in regions where we run existing projects on our infrastructure, The contribution margins for each additional bracelet can be high, even as high as 70% or more. We decrease our R&D expenses by $90,000 while we continue to develop and launch new features and improve existing products, keeping us at the edge of innovation and technology leadership in our space. In addition, our sales and marketing expenses decrease by $50,000 while we increase our revenues year over year. Moreover, our general administrative expenses increase by $300,000 to accommodate our management team expansion, also in the U.S., which has already yielded results, such as evidence of the three new contracts we have won in the past months. The company's operating income improved by $1.8 million from $700,000 compared to an operating loss of $1.8 million before. So we improved by 1.8 to $700,000 compared to an operating loss of $1.1 million in the prior year, resulting from a significant increase in our gross profit. EPS improved to positive compared to a negative EPS of $0.32 in the prior year period. The company's EBITDA improved by 400%, $2 million, compared to $400,000. Reflecting benefits, operating leverage associated with high revenues deployed in new IoT projects and continued progress on the faces in our ongoing projects. This achievement underscores our focus on sustained growth and profitability. Our net income improved by $2.3 million from a net loss of $1.5 million last quarter to a net profit of $800,000. this quarter. And our non-GAAP net profit improved by $1.6 million to $1.35 million profit compared to the $250,000 loss in the former year period. Positive non-GAAP EPS improved to positive $0.07 compared to negative non-GAAP EPS of $0.05. Our cash position is stable, we have a credit facility in place, and we focus on reducing our need for external cash as we continue to win and execute more new projects. Last month, we completed a successful close of $2.9 million public offering to support the company's continued innovation and growth initiatives, a testament to the investment community's trust in our vision and strategic trajectory. In addition, the company had one-time expenses of $280,000, mainly pertaining to the legacy business and allowance of debtful debt. We continue to invest in our sales and marketing, as well as R&D, to drive revenue growth and expand our global footprint and execute our business plan. In closing, I'd like to thank our global team for the hard, tireless work to achieve our company's record-setting performance this quarter. We have developed the right technology and products to help criminal justice systems clients overcome challenges and make better use of the over $80 billion spent annually in the U.S. on operating rehabilitation centers and prisons. With research showing an approximate 75% recidivism rate in the U.S., there's significant room for improvement when effective programs and technology are deployed. We're excited about the growth we are experiencing and about the growing demand for our products. After several years through which we transitioned from our legacy business of IoT tracking to a vendor business, we're happy to show the shift to nice growth in revenue and profit. We believe that we're well-positioned to continued growth and continued expansion by capitalizing on the many new opportunities before us. These are being driven by multiple factors, including our strong presence and reputation in the U.S. and European markets, the counter-cyclical nature of the electronic monitoring industry, the growing public policy shift to monitoring instead of incarceration, and the growing adaption of domestic violence prevention solutions. We anticipate sustained growth by further expanding our market share in the U.S. and Europe. Our commitment to preserving our technological advancement as a robust growth foundation remains steadfast as we continue to invest in this area. With that, I'll turn the call over to Operator for questions. Operator?

Thank you. Ladies and gentlemen, if you wish to ask a question on today's call, you will need to press star then the number one on your telephone. If you are 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 question, you may do so by pressing star two. One moment please for the first question.