Supercom Ltd (SPCB) 2019 Q2 法說會逐字稿

Good morning.

Welcome to SuperCom's Second Quarter 2019 Earnings Conference Call.

Joining us on today's call are SuperCom's President and Chief Executive Officer, Arie Trabelsi; and President of SuperCom Americas, Ordan Trabelsi.

Before we start, I'd like to point out that this conference call may contain certain projections or other forward-looking statements regarding future events or future performance of the company.

These statements are only predictions and SuperCom does not guarantee that they will, in fact, occur.

SuperCom does not assume any obligation to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand and the competitive nature of the security system industry or due to risks identified in the documents filed by the company with the Securities and Exchange Commission.

In addition to disclosing financial results calculated in accordance with the United States generally accepted accounting principles, GAAP, this call also contains non-GAAP financial measures, which SuperCom believes are the principal indicators of the operating and financial performance of its business.

Management believes non-GAAP financial measures provided are useful to investors' understanding and assessment of the company's ongoing core operation and prospects of the future as the charges eliminated are not part of the day-to-day business or reflective of core operational activities of the company.

However, such measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Reconciliation of non-GAAP measures to the most comparable GAAP measures are provided in the schedules attached in the earnings release.

At this time, I'd like to turn the call over to Mr. Ordan Trabelsi.

Sir, please proceed.

Thank you, operator.

Good morning, everyone, and thank you for joining us today.

Remarks will be short and focused.

It's been only 2 months since our last earnings call.

Earlier today, we issued a press release with our financial results for the second quarter of 2019, a copy of which will be available in the Investor Relations section of our website.

For the second quarter of 2019, we continued with year-over-year and quarterly sequential improvement in earnings, reaching EBITDA of $1.9 million and non-GAAP EPS of $0.07 for the first -- for the second quarter.

In revenue, there has been some interesting shifts and movements.

While revenue has declined to roughly $5.7 million compared to $6.8 million for Q2 of 2018, a closer look shows that it's in line with our overarching strategy, with the decline coming from our e-Gov segment as we have diverted focus and resources away from developing countries towards North America and Europe and our IOT and Cyber segments.

e-Gov segment revenue decreased by 85% approximately year-over-year, while at the same time IOT segment revenue increased by over 41%, and a subsegment, IOT products revenue, increased by over 65% year-over-year.

This subsegment relates to the part of our IOT segment, which consists of product-related revenues, which is mainly the lease of our equipment and software-as-a-service to our proprietary electronic monitoring, peer security technology suite, which has been performing excellently in competitive tenders around the world.

The remainder of the revenues fall into IoT services, which are mainly services we provide to customers in the criminal justice space in unison or complementarily to electronic monitoring public tenders.

We've seen growth in IoT service revenues as well.

Cyber segment had minimal growth or a few percentage year-over-year, and they gained high retention as we prepare for new cyber products deployment to a strong, long-term customer base.

The revenue breakdown and composition of the second quarter reflects significant progress in our multiyear strategy and business plan.

We have been able to leverage our strong global brand of over 30 years as a government contractor in national security and our proprietary technology to shift most of our business to developed nations and recurring revenue-based segments of IOT and Cyber security software.

Our percentage of revenue from developed countries out of our total revenues, which is less than 5% in 2015 and approximately 67% in the first quarter -- in the second quarter of '18, has reached a new high of over 93% this quarter.

With a big focus this quarter and in recent quarters on recurring revenue-based deployments for customers in developed nations, such as the U.S., Denmark, Sweden and Canada, we have numerous ongoing project deployments in our IOT business segment and various new ones in Cyber security business segments.

In the recent past, we are expanding into new countries and governments faster than ever before with an exceptionally high win rate.

Lastly, we announced 8 new project wins in IoT this year.

We're now halfway through it and have announced the launch of 7 new projects, launching in 2018, and expect continued wins and success going forward as our global presence in technology improves with every new project.

These projects are expected to also generate long-term recurring revenues for years to come as well as additional business from customer references.

As the revenues from each of our business segments grow, we expect gross margins to grow as well, leveraging the fixed costs which make up part of our COGS, such as 24/7 maintenance and tech support.

Furthermore, our team of outstanding employees around the world have been working exceptionally hard this year to tightly manage costs, unleashing operational synergies and cut out [breakdown issues].

And this is with significantly improved operating structure released this quarter.

Non-GAAP gross margins as high as 61%, and sequential and year-over-year quarterly improvements to operating expenses, reaching a low of $2.7 million on GAAP operating expenses, a 34% improvement from $4.1 million in the previous year period.

We see sequential and year-over-year improvement to EBITDA margin as well, reaching a high of 33% this quarter compared to 21% in the previous year period.

We haven't seen these kind of numbers in SuperCom in years.

They resemble the lean operating structure of 2015 before acquiring 5 additional companies, most of which were in distress.

Yet today, our business prospects are multiples greater, with 2 additional business segments and growth engines, IOT and Cyber; over 60% growth in our IoT product revenues; high-recurring revenue percentages; a major presence in developed markets with more predictable revenue streams; and significant enhancements to our technology portfolio, backed by 119 patents.

Some additional recent updates.

At the end of 2018, as many of you know, we executed a $20 million credit facility from funds managed by Fortress Investment Group, a large U.S. investment management firm with about $40 billion under management as of June 2018.

This has allowed us to grow our working capital to properly deploy our numerous ongoing multiyear projects as well as signal to potential customers and partners that we have capacity to do even more.

We're working continuously on collecting our trade receivables.

It's important to note that we're dealing with percentage of completion, or POC projects, and national governments in developing regions, such as Africa, collections have historically taken more time.

This is not unusual.

But obviously, there's a track record in collections and understanding that the systems we operate, national biometric passwords among others and [e-card] users, are critical to the cooperation of the governments we serve where we have leverage.

To reiterate and conclude, on $5.7 million in revenue this quarter, we generated non-GAAP EPS of $0.07 and EBITDA of $1.9 million, [presenting] a 33% EBITDA margin.

It was [hard] to reach this optimized cost structure and the strong core, and with top line growth, we expect profitability margins to grow further.

On top of that, we have large pipelines and more project deployment opportunities across our business lines.

And while the time lines within some of these project opportunities carry a level of uncertainty, our recent performance and increasing win rates give us confidence that we're on the right track.

In summary, we're working diligently on building a strong core operating structure, which is lean and effective, and in parallel, setting a runway for continued and more predictable growth in our steady-state recurring revenues.

At this point, I'll turn the call over to Mr. Arie Trabelsi.

Arie?

Yes.

Thank you, Ordan.

As you just heard, we had a good second quarter here at SuperCom, highlighted by significant growth in our IoT business and revenue from North America and Europe, as well as an improved financial cost structure (inaudible).

Moving forward, we remain focused on growing our margins to even greater levels by revenues of business and traditional (inaudible) that drove deployment into long-term steady-state recurring revenue generation.

We are confident in our prospects for the coming year and beyond.

And with that, we are ready to open the call for analyst questions.

Operator, please provide the appropriate instructions.

(Operator Instructions) Our first question comes from the line of Kevin Dede with H.C. Wainwright.

Obviously, the big question is, the elephant in the room, give us some update, please, on the audit for the end of 2018.

I guess when we left it last time, we saw -- at the early June call, we didn't have that wrapped up yet.

So we put out a PR showing the data, [indeed,] but we believe that the audit will be finish its result of the 2018 in the coming weeks.

As for an exact date, we'll put a PR for that.

Okay.

So sometime, you think, maybe before the end of the month or early September?

No, there are -- could be that date, but it's around these dates.

Okay.

So can you give us a glimpse of the balance sheet as best you understand it?

Where do you think your cash balance is?

Understand that you need to use Fortress to help support all the IoT growth and well understand that they're capital-intensive upfront.

And given that there have been so many wins, we'd imagine that's been an important growth supporter for you.

So could you give us some insight on that?

Kevin, look, I cannot get into the old balance sheet [I'm afraid], it's a better agenda linked to the -- and like (inaudible) some of the features there, the cash and restricted cash of about (inaudible) $3.5 million.

Yes, it's, as you know, a very important question with all these rumors in that -- in the deployment and building the product for our customers.

So we do need cash to do that.

And we have focused with a great -- [it's hard to do] the exposure.

And we believe -- I believe that once we conclude the deployment, some of these contracts are turning to be a cash generator, and we will see it's going to the right direction.

(inaudible)

Right.

I'm trying to -- yes.

I'm sorry, Ordan.

It's really kind of hard to hear him.

So you can't speak to where you are with Fortress, but you have, what, you think $3.5 million on the balance sheet in cash?

Yes.

He said we've got $3.5 million of cash and restricted cash, and he said Fortress is supporting us.

As we shared in the past, when deploying new projects, the first 6 to 12 months will be cash flow negative.

And then for the next quarter, [then] years, you're cash flow positive with good margins.

But the first year of deployment, you have to manufacture the equipment, you have to do cost innovation, training, deployment, and that was good to have working capital support there.

Yes.

One thing that's also important to mention is we -- as we said, we were moving from the emerging countries to developed countries.

And we still -- the collection from the emerging countries is slower, while the collection from the U.S. and Europe is fantastic.

So we are -- as we move for higher revenue, and it's coming from Europe and the U.S., we see a very nice cash flow coming now on time.

And the execution and (inaudible) we're finalizing at this time, all that comes from these countries, so you can imagine that we are in the right direction of (inaudible).

Okay.

Yes.

So part of what goes hand-in-hand with that is the sales mix and you talked nicely, Ordan, about the change in mix, right?

IoT, up 41% year-over-year.

Can you talk a little bit about what happened sequentially?

The top line was flat.

And I'm just wondering if we still -- just in the first 6 months of the year, if we saw a decline of the e-Gov versus an increase in IoT.

Yes.

What we saw also in the second quarter, and I think we mentioned in the PR, that within sequential, we had an increase of the IoT product and segment.

With the first quarter of the year, it was offset by expected decline from the -- it had grown, as we said we're moving from an emerging country to a developed country.

So yes, we continue to see an increase both in products and in the sub-segment of the IoT in the last year and also from Q1 of 2019.

So congratulations on the -- all the new IoT deals, right, the one in Georgia, Tennessee, North Carolina, California.

Can you talk to the ones in the first quarter versus the second quarter?

We should start seeing revenues on those, correct?

Yes, that's what I said.

Most -- yes, as we've said, there -- if you look at the revenue in both quarter, and we said that there have increased on the IoT for the (inaudible) and the majority of the revenue are from the IoT, a smaller part of that is from the Cyber Security division.

And the smaller part is -- or almost a liquid part is all from the emerging countries.

So we will continue to see maybe additional 1 or 2 quarters of decline in the results before we see an increase on (inaudible) with transition to the (inaudible) in the (inaudible) as well.

Like before, we believe that we'll continue to see increase in revenue from the IoT as we are in different stages towards completion with the deployment of the large IoT contract in Europe.

Note that also our projects that started in Q2, we're not going to see much revenues on them yet.

It's literally a few months and you deploy it before you start actually running units and generating recurring revenues.

And some projects, like the one in Europe, I'd say, they have a more complex deployment.

We have a little bit of deployment revenues there as well.

But the ones in the U.S. that you described, they have an [HO] to do quicker deployment and you start actually generating revenues when the units are on tenders.

So you'll see them soon, but not necessarily everything you saw that we won in Q2 is going to hit revenues yet in this quarter.

It is interesting to note, a lot of the growth in IoT is getting masked by the decline in e-Gov.

The decline in e-Gov cannot continue forever.

So we hope that soon this growth will be much more substantial and have a meaningful impact on our total revenue contribution.

Right.

Arie said that you could -- we could see that change in the mix in 1 or 2 quarters.

If I understood him correctly.

Okay.

So let's switch gears a little bit to the Cyber side, please?

I understand this year is one of sort of reconstituting products.

And I'm wondering where you stand on that.

Granted that your customer base is sticky, so the revenues will be consistent, but I'm wondering where we stand on the new product releases and the interest that you're seeing in your customer base.

And more importantly, your business development activities to start to see that business -- so we might be able to start to see that business grow.

Okay, great.

A lot of our customers in Cyber Security, whether they're in the hospitals or banks or other large enterprises, have a very difficult process in deploying new products.

It could take up to 18 months to do a new deployment.

While they work with Safend, they already have our agent, our software installed on tens of thousands of laptops and endpoints, for them to have an additional product with Safend is very simple.

It could be done within less than a week and it gives them a lot of comfort and minimal risk in comparison to others.

That opens up an avenue for us to deploy new products mainly in the advanced persistent threat, anti-malware and -- new generation anti-malware product to these existing customers of ours.

They have shown great interest in various new products that we've shown them, whether it's POC stage or demo stage.

And these are products -- our core Safend product, running for over 10 years and stability is one of its main strong points.

When we deploy it to a new customer, we want to make sure that the new products have the same level of stability.

So we're taking it slow.

We're deploying it into various environments, testing the various potential scenarios that the products will work in.

And as time progresses, we'll be closer to deploying the new product.

And we think that when they're deployed, there is significant potential for increased revenues in the Cyber segment, increasing the multiples of the current Cyber revenues if we have adoption just from our existing customers to these new products that we've been working on diligently over the past couple of years.

Okay.

So could we just zero in a little bit on the time line, Ordan?

I understand that's somewhere in POC or demo or beta, but give us some insight on when you actually think their -- they'll shift for revenue or an adjunct to revenue with your customers and what you're doing to grow your -- or what you're at least going to contemplate in growing your installed base?

When you say contemplate in growing, it's probably a comment on sales strategy or...

Yes, sales -- business development, right?

I mean, granted your resources are restricted right now and you can't deploy a ton in business development, but given that your competitors here, you're going to want to at some point chase new business.

And I'm just wondering when those factors sort of come together, when the products are ready to be fully marketed and when you think you'll be ready to start selling it hard.

Okay.

Good question.

And you touched on an interesting point.

Currently at SuperCom, in most of our divisions, we are driven by technology, our growth, especially in IoT is less by sales and business development, more just by the prowess of our technology and when it compares in competition.

In RFPs, we get higher scores and win that way.

We've not invested much in sales and business development unless that will change in the future.

But currently, much of our focus is on technology, also in Cyber security.

We have some effort on maintaining our existing customers, we have some account management.

But mostly, it's our technical teams that work with the customers to get them completely satisfied and deploy new products that they're excited about because of technology.

Regarding time lines, we have already deployed -- this summer, we deployed some new capability for one of our products called Protector, something that's based -- a location-based power feed and some new capability that some of our actual customers in the government security space have been very interested in and some have already purchased this additional product capability.

There's other capabilities of similar nature that we're working on and we plan to deploy in the second half of 2019.

And some brand new, let's call, completely new modules, which we hope to have some launches of in 2020 and then continue in 2021.

When we start deployments on completely new modules and we see that they're progressing well with our customer base, we would increase efforts with our existing customer base.

We're not yet planning to go out to new customers.

We find it much more attractive and much less costly for us to utilize the customer base.

We have over 1 million active licenses around the world, laptops running our software, hundreds if not thousands of existing active customers in Europe and the U.S., and we have great relationship with them.

So that's the strategy which we'll take in the last couple of years.

I think we (inaudible) even in comparison to some other start-up and with some other company that sent out a cyber product, which are not always 100%.

Maybe in our case, because of the reputation and the stability of the [cyber] solution suite are very, very important.

They mean a lot to customers.

They are -- so it's very important for us to make an extra time to make all the tests and decisions that we can do today before we put up a new product or additional models with -- to the suite, because the last thing we want is when our existing customers for many years would get a model which is not 100%.

They should be product ready, right?

We should have some additional time that we must and we want to have before we provide it to our existing customers.

Okay.

Arie, I appreciate the additional color.

All right.

Last question from me is on the e-Gov side.

I'm wondering sort of where we stand there.

I know that -- I mean, it's always a question, right, from the investment community because we had seen those big contract awards or at least an interest and you delivering to big contracts.

And in many cases, they didn't pan out.

Some cases, they did.

And I know that business isn't seeing any more or much less attention, I'm just wondering where you think we stand there and what you think we should expect.

Yes.

Okay.

Thank you for this question (inaudible).

We mentioned in the past, the e-Gov is a multibillion-dollar market, and given we have excellent products and excellent solutions and a very good application there.

There's a lot of gains and as you know and we've discussed it in the past that (inaudible) $100 million are convinced that we were notified this result and the current (inaudible).

And this process which we went through many times in the past are actually in the emerging countries.

And some of the reasons [explained] at the time and extra (inaudible) that if we make a decision 2 years ago, as we said, to switch -- to make our operation to Europe (inaudible) paying on time.

And what matters there is that your products are excellent.

Now once we decided to do that, we did not give up our existing customers.

We support our existing customers.

Right now, we're (inaudible) now, but we are not running or pursuing the opportunity in these countries.

We are preparing our strategy of selling these and et cetera toward the U.S. and Europe.

Now remember, the U.S. market for e-Gov and it's -- our shareholders [$4 billion] I mean, you're aware, we are (inaudible) in the U.S. with excellent solution for that.

It's taking more time to design the solution from what we have to -- what we feel we need there, including mobile ID and (inaudible) but we believe that we are on the right path there.

We've gone through (inaudible).

The first thing we believe is that it's going to be much easier for us to get additional states and get to a larger market in the U.S. We have done it in the IoT, with (inaudible) contracts and consumer (inaudible).

I believe that we will -- we want to achieve the same also in the U.S. with the e-ID market.

And in Europe, the European market for e-ID is somehow dominated right now by 3 large companies that are from Europe.

And as you know, the market that was acquired (inaudible) and the other 2, 1 German, 1 French -- I mean with 2 French and 1 German that are right now dominating a larger European country.

Actually, we are starting and aiming to get contracts with -- in the smaller [mid] countries in Europe.

So getting and bidding there.

And I believe that we'll repeat what we have done with IoT in these countries because (inaudible) in those countries in [differential] products and we'll provide more good choices for them.

So we are there and I believe that once we have this kind of contracts, which, as you know, the form factor is a little bit longer as well in all cases, like tenders and et cetera.

So I believe that in some time in the future, this will start to get signed, the contract.

Also in e-ID in Europe, I believe was earlier than in the U.S., that I believe that the U.S. is also a good market for us.

So I do believe that during the -- the division (inaudible) is going to go back very first to a high-yield generator for us with the (inaudible) contract.

And you can check what (inaudible) in the U.S. all the (inaudible) between 4 to 5 years plus option.

There are about 4 tenders every month.

We'll [state --] every month, we're doing being tenders for DL, driving license; ELD or mobile ID throughout the country.

We are participating there.

We're running from the way they had to bring (inaudible) which is really different than the others.

And we believe that we are getting closer to that -- to win tenders as well there.

And in order to win the first one, as we said, there's going to be, I believe, an open bid for.

So yes, we have excellent reputation, people, products and platform, with portfolio in many of our -- many countries around the world for many years.

20 years, 25 years with no problems.

And when they decided to move to other areas, but still the systems [following] and we believe that we'll bring these expertise [very] well also to Europe and to the U.S. And I do believe that we'll start to see some of these revenues and higher revenue in the year 2020.

Meanwhile, as we've said, the R&D is running very fast.

It's even -- it's been difficult for us.

All (inaudible) is good but that puts a lot of pressure on our R&D team and deployment team to complete all of them.

We're doing it in a very nice way.

They're about to do completed solutions (inaudible) get cash generated from those contracts.

And besides, what you see now they're in a position with a very large operating expenses.

We'll start to see also, and in true form, the top line, which should will go on most -- go out together to contribute our bottom line as [Ordan] and I have been discussing.

Okay.

Just one quick follow-up, Arie.

The purchase of LCA gave you a foothold in the U.S. and it's that foothold that allows you to chase other government contracts, right, outside of just the electronic purview, electronic monitoring purview.

LCA in general -- okay, we're done finances in Q2.

I don't want to (inaudible).

We're not -- no we're not...

Let me -- okay.

Our brand for 30 years as a government contractor in securities and software projects, most of the projects we've done were around credentialing, biometric ID cards, passports, driver licenses and others.

So in that specific field, we have a lot of references and a lot of experience to show for.

It was harder -- in 2015 when we started to go into IoT, it's harder to bid on projects in the tracking offender domain, and the acquisition of LCA helped us significantly there because they have stronger [proceeds] for over 25 years of doing exactly these type of programs.

They'd done with -- pioneered programs in California and already in San Francisco back in the '90s.

So together with those references and experience of very strong staff there, we're able to win more projects in Europe.

At this point, we already have a lot of references from various places around the world.

So we're in a much better position to continue bidding on more projects.

But it's interesting to note that it is a ladder on the size of the project, and we can't yet bit effectively on projects that are $100 million in size.

And there are ones like that, whether it be in Florida or in California or the country of Colombia in the tracking offender space.

But every time we bid on larger projects and we win them, we use those references to go a little bit larger.

And so when we started, we began looking for maybe hundreds of thousands of dollars, some of the projects we've won lately are $6 million or $7 million, and we continue to climb that ladder.

We believe that we're already at the top.

I can [surely relate].

If you look at the companies that dominate one of the [ID] markets in the U.S. which is known for the way they got into the European countries, they acquired a company called L2.

I don't know if you encountered this company.

And by acquiring this company, they got I believe fully -- full stake out of the [outskirts] of the United States.

So they have a lot of these contracts by acquiring them and (inaudible) additional stake.

Now we do believe that our products and our technology, especially on the mobile side, et cetera, are good -- at least lead us there and maybe even to be better.

And we believe that as we lead again, other large players in the IoT and (inaudible), we've got products with better (inaudible).

And you see we are (inaudible), which we really like.

And we're getting closer to the point that we have equaled their proposal, and I believe that this is -- they are offering of course (inaudible) overcome those [lower-rated] (inaudible) in this space.

And as we said, right now, they have most of the states in the U.S., and we believe the chances that we'll get a win, the first one is be able to divert.

They do not have a better product than ours and we see their product all over the world.

Even for our product in emerging country, and I believe that our products are much, much more robust, flexible and better products.

But there's no reason for us not to get stake in the U.S. for our e-Gov platform.

This concludes our analyst question-and-answer session.

I'd like to turn the call back to Arie Trabelsi for closing remarks.

Okay.

Thank you for joining us today for the call.

I especially want to thank our employee and partner, our investor for their continued support.

We appreciate your interest in SuperCom and confidence, and we look forward to update you on our next call.

Thank you.

The event playback has concluded.

Thank you.