Arie Trabelsi - President, Chief Executive Officer Ordan Trabelsi - President, Americas.

Rob Stone - Cowen & Co..

Ladies and gentlemen, thank you for standing by. Welcome to SuperCom’s fourth quarter 2016 conference call. All participants are in a listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded.

Joining us on the call are Arie Trabelsi, President and Chief Executive Officer, and Ordan Trabelsi, President of SuperCom of Americas. A press release disclosing the financial results was released earlier today and is available on the company’s website at www.supercom.com. Following comments by management, we will open up the floor for questions.

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 certain performance of the company. These statements are only predictions and SuperCom cannot guarantee that they will in fact occur.

Furthermore, the company will provide non-GAAP information, and we refer investors to the non-GAAP reconciliation provided in the earnings release. 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 systems industry, or due to risks identified in the documents filed by the company with the Securities and Exchange Commission.

At this time, I would like to turn the call to Mr. Trabelsi. Ordan, the floor is yours..

Good morning. I’d like to thank everyone for joining us today. First, I would like to apologize for having to reschedule the earnings call. Given the complexity of the audit, we were unfortunately not at a point to announce results last week [indiscernible] to get it done.

This is not the first time it’s happened, but we are confident that we now move forward beyond 2016, we’ll be more consistently and timely with our reporting. 2016 was a busy year for SuperCom, one in which we made dramatic progress and positioned the company for long-term growth, but also faced challenges which impacted our performance.

By virtue of the five acquisitions which we made in late 2015 and the first half of 2016, our business has been transformed. Growing pains have come along with this, but we are creating a more valuable enterprise which is better positioned to drive sustained long-term value creation.

At a high level, there were three changes at SuperCom since the beginning of 2016. We have dramatically expanded and improved our addressable markets.

SuperCom has expanded from being primarily a secure electronic ID company for government identity programs dependent on where we were awarded large government contracts, to being a leading provider of secure ID and security solutions across multiple high-growth markets, including national identity, electronic monitoring, and cyber security, complemented by new Wi-Fi and secure mobile payment technologies to support these core markets.

The more diverse markets for the new SuperCom share the common characteristics of high growth rates, recurring revenue opportunities, attractive margin dynamics, and high barriers to entry. Secondly, we have grown our technology and IP. We have gone from having seven patents at the beginning of 2016 to 119 patents at the end of 2016.

Our IP is valuable and in many cases with the acquired companies is underutilized and not effectively brought to market. They dramatically diversified our customer base and pipeline. In the beginning of 2016, we had approximately mainly 20 government customers. Today we have approximately 30,000 customers in our customer base.

Furthermore, the quality of the revenue is shifting to more recurring revenue from more dependable customers. During the year, we reduced our exposure to the emerging markets with new revenue from governments, enterprises and individual consumers in the U.S. and Europe.

Our steady state revenues which are mainly recurring revenue derived from software licenses, maintenance and support, as well as consumables and software and hardware upgrades, have reduced from 95% in emerging markets to approximately 50% in the emerging markets and the rest in developed markets [indiscernible] 2017 according to our expectations.

Additionally, the percentage of steady state revenues contributed from our end-to-end cyber and Wi-Fi and payment divisions has risen from less than 10% in sales in 2016 to an expected 50% of sales in 2017.

Our average sales cycle will continue to decline as will our exposure to government customers as revenues from non-government customers grew from less than 5% in 2015 to over 10% in our expectations for ’17. As a result, we were, we are and will be less sensitive to volatility from emerging markets and geopolitical environments.

That said, all the activity and progress has come with growing pains. Our consolidated revenue has lagged our expectations. Our [indiscernible] division was materially impacted during the year by macroeconomic challenges in three countries where we are implementing large-scale deployments for new and existing customers.

I will provide more detail on this in a minute. Our cost structure remains too high and we are working diligently to realize efficiencies as we consolidate the business while proactively investing in and maximizing the impact of such things as R&D and sales and marketing for long-term growth.

The integration of these companies has, as I mentioned up top, delayed our reporting beyond where it needs to be. Management is the largest shareholder and the urgency to improve the timeline and the timeliness of our reporting is not lost on us. It is a top priority.

We have enhanced the finance staff, reporting systems and controls in order to get there. As you can see, we have work to do but we feel we are attractively positioned to build long term value. We have a baseline of steady state revenues with additional upside from there as we close incremental business from our valuable pipelines.

As our revenue composition improves and grows, our gross margins we expect to improve. We’ll continue to optimize operating expense levels albeit at stronger levels of profitability. Let me update specifically on each of the divisions of our business. I’ll start with e-ID and e-GOV, which is and will remain the foundation of our business.

As we indicated previously, our e-ID operations had been materially impacted by macroeconomic challenges in three countries where we are currently implementing large scale deployments for new and existing customers. One of these large deployments fully resumed during the third quarter and was completed in the first quarter of 2017.

This has transitioned to steady state and started generating recurring revenues. The second largest one was delayed, picked up pace and we expect to finalize deployment in 2017 and enter into steady state recurring revenue. In the third country, we deployed add-ons to an existing customer.

Our work was slowed down by macroeconomic challenges that had impacted the local economy that were then further challenged as a result of an earthquake in the region.

The government implemented a temporary [indiscernible] tax increase on import items, which included all product and materials related to our project which meaningfully deteriorated our gross profit from this project.

In addition to existing projects, we have been working diligently to advance a number of large and late stage opportunities [indiscernible]. This effort has been challenged by the macroeconomic environment and global commodity pricing which has directed impacted some of our target customers.

These issues have also slowed our ability to deploy new projects in a number of regions where we are competing. An example of this is the country that I referred to earlier, where they materially increased an import tax to help stabilize the economy, reduced our quarterly gross margins from that customer to nearly zero.

In addition, because we are moving up the value chain and competing for larger, more strategic opportunities, our competitors have taken actions to contest our success. This is not unique to SuperCom; in fact, intentions and efforts to drive reevaluation of tenders have become a common industry practice in the current environment.

While we believe that our customer focused approach and dedication to providing value through true innovation will prevail, as it has many times in the past, these contentions are costly distractions, slowdowns and delays to negotiations or awarding processes.

Despite these challenges, which have impacted our financial results, we have had some very important successes in e-ID recently.

In December 2016, we together with a local partner were awarded by a new large Latin American government, Colombia, a contract to migrate and implement nationwide SuperCom’s proprietary state-of-the-art secured web-based land and geographical registration and information management system.

The project went through a formal competitive bid process with other established industry players. The project is expected to be completed by July 2018, and we expect to recognize a majority of the deployment revenues this year in 2017. The first stage of the contract, migration and software customization of SuperCom’s web-based platform is underway.

According to project timelines, by August the next phase will commence, consisting of full nationwide implementation. In March of 2017, we were awarded a new contract representing more than $3 million in value.

We will be providing various core elements of our flexible electronic e-ID solutions with potential for additional follow-on orders in the future, as is commonly realized with these types of contracts. We expect full revenue from this contract to be recognized by August 2017. We continue to see significant tender activity in e-ID.

Global sales continue to support the need for more security, border control and secure verifiable identification, and we are well positioned to offer solutions to growing problems. SuperCom has the right platform, experience, and expertise to perform well in these tenders.

Onto the M2M side of our business, where we focus on tracking offenders and electronic monitoring. We are seeing significant activity in the electronic monitoring tracking market both in developed nations and in emerging markets.

We have been selected by governments in seven new countries around the globe since the summer of 2015, so we are well positioned to grow our presence in this division. The public safety market for electronic monitoring and offender tracking is projected to grow in excess of $6 billion by 2018.

Integrating the acquired LCA business division [indiscernible] out of California into SuperCom and pairing the proven ability to provide the standard base electronic monitoring programs and methodologies to that of SuperCom’s electronic monitoring technology has created a compelling value proposition that is resonating not just in existing markets but new ones as well.

We are also on the midst of a multi-year renewal in Marin County, California. LCA has provided services to Marin County since 1991 and has been under contract to manage and operate its current electronic monitoring program since 2010.

The program, which was renewed in September 2016, is monitoring a high number of offenders and provides youth services for juveniles, a higher number of offenders, and more services. Under the contract, LCA is integrating SuperCom’s proprietary PureSecurity electronic [indiscernible] platform for tracking and monitoring offenders.

We have continued to deploy SuperCom’s PureSecurity technology solutions into LCA’s existing customer base. Since the acquisition has closed, we have integrated SuperCom’s proprietary technology to successfully track over 1,000 offenders in California. The transition has gone very well.

In addition to providing a much more innovative, energy efficient, ultra-long range active RF ID technology, coupled with advances of the smartphone, the integration of PureSecurity also lowers LCA’s equipment costs, which directly improves margins.

In December, we were selected to [indiscernible] and deploy community-based supportive services programs to reduce recidivism in a new country in northern California, further extending our presence in the state.

This new program commenced in Q1 2017 and is valued at approximately $500,000 per year, and was awarded for an initial term of 18 months with an optional extension up to five years [indiscernible] $750,000 and $2.5 million in total program revenue.

The program is expected to provide us with a valuable platform in this county, opening up other potential growth opportunities.

We are also now taking advantage of SuperCom’s corporate infrastructure and established sales channels to leverage LCA’s experience and track record to expand our electronic monitoring footprint beyond California, both domestically and internationally.

In October, we announced the deployment of our PureSecurity technology in Ohio via partnership with a leading local based criminal justice company with years of experience serving the adult and juvenile courts.

We also recently were selected by the Czech Republic’s Ministry of Justice to deploy our PureSecurity electronic monitoring suite in a comprehensive nationwide program that’s to encompass electronic monitoring of offender programs within the country with plans to monitor up to 2,500 enrollees simultaneously.

We will deploy our PureSecurity electronic monitoring solution which will include home detention, GPS tracking, domestic violence and alcohol monitoring of offenders. The award was won through a formal bid process in the form of a competitive dialog. Six companies, including established industry players, took part in this process.

The awarded value of the contract based on the government’s budget is $3.7 million over a term of six years. We are set to deploy the initial order and start generating revenues in the near future. We are actively piloting and bidding on tenders in other states and other countries and seeing a growing pipeline of new opportunities.

Lastly, to discuss our cyber, connectivity and payments divisions. The core of the Wi-Fi part of our business stems from acquisition of Alvarion, a provider of autonomous Wi-Fi networks, which we purchased in 2016.

Alvarion designs solutions for carrier Wi-Fi, enterprise connectivity, Smart City, Smart Hospitality, connected campuses, and connected events. They are one of the most influential players in Wi-Fi based solutions with a strong reputation of reliability and performance in over 25,000 sites in more than 95 countries.

They have made significant progress reorganizing the sales and support teams around the world. We are very encouraged by the fact that many of its existing customers are putting in new orders, ranging from $5,000 to $300,000 each.

Alvarion’s supply chain and [indiscernible] production facilities management is up and running, which is something that we had to do as part of integration and has been a critical milestone. An important asset of the Alvarion acquisition, though, is the ability to cross-sell other SuperCom solutions.

Historically Alvarion provided access points, creating a mesh network for wireless internet connectivity for participants in [indiscernible], but as a result of the combination with SuperCom, we’ve been able to significantly expand this specific opportunity.

For example, Alvarion and Safend, our cyber security business which we acquired last year, have collaborated to launch a new secure Wi-Fi platform for enterprises, creating a trusted platform with multiple [indiscernible] applications to fight cyber attacks and malicious entry into private networks.

Safend, which was also acquired last year, has performed well and achieved quarterly sales bookings of approximately $1.35 million in Q4 of 2016.

Since closing that Safend acquisition, we have reestablished the company’s direct and indirect sales channel to enhance their distribution by leveraging SuperCom’s global infrastructure and global sales channel. PowaPOS, the secure point of sale platform we bought last year, has been rebranded to VeloPOS.

The roll-out of this rebranding is part of our strategy to include proprietary cyber security capabilities and features into this advanced all-in-one payment platform. While we have made a lot of acquisitions, they are very strategic and complement each other. Here is a great example.

We are now integrating our VeloPOS mobile point of sale [indiscernible] solution and SuperCom’s SuperPay mobile payment software with Alvarion solutions, and are also integrating SafeMobile [indiscernible] to encrypt and protect applications on the [indiscernible] product offerings coming together into one united solution, increasing revenues and value for a potential customer and leading to more and more potential customers.

We signed our first agreement to implement solutions of this type in Latin America in 2016. Finally, we continue to be excited about our prospects [indiscernible] on our payments projects.

We launched a mobile wallet solution with VeriFone and Nofshonit, one of the largest loyalty club providers and operators in Israel with over 1 million active users.

As part of the agreement, our secure mobile wallet application, SuperWallet, is used by existing and selected loyalty club clients through Israel and allowing for mobile payments at point of sale instead of using a rechargeable magnetic card [indiscernible] which has previously been utilized in these LC programs.

The solution provides a range of services such as [indiscernible] funds for goods at shops and generating recent activity inquiries. We will generate revenues through this relation by a register model as users utilize the service.

In another example of cross selling between our solutions, most of our e-ID projects are incorporating our secure payment solutions, providing their users and easy and secure payment method, including mobile payments. In summary, it was a challenging year with a lot of moving parts.

That said, we significantly expanded our addressable markets, customer base, and technology platform. While our financial results do not yet reflect it, we are in a much stronger position today to build long-term shareholder value and will continue to work hard to produce improving results.

I’d like to now briefly review some financial highlights, which have been released earlier today in the press release.

For the full year of 2016 compared to 2015, we saw revenues of $20.3 million compared to $28.3 million, EBITDA loss totaling $8.25 million compared to EBITDA gain of $6.9 million in 2015, non-GAAP net loss of $9.5 million compared to non-GAAP net income of $6.2 million, GAAP net loss of $11.25 million compared to GAAP net income of $1.02 million, R&D expenses, operating expenses of $6.72 million compared to $3.67 million in 2015, representing some of our increased R&D investments this year, total assets of $56.6 million compared to $65.9 million in 2015.

In the second half of 2016 versus second half of 2015, we had revenue of $9.45 million compared to $12.9 million in 2015 second half, EBITDA loss totaling $7.02 million compared to EBITDA of $1.36 million, non-GAAP net loss of $7.7 million compared to non-GAAP net income of $0.9 million, GAAP net loss of $9.89 million compared to GAAP net income of $2.13 million, R&D operating expenses in the second half were $4.02 million compared to $2.16 million in the second half of 2015.

Our cash levels have decreased from $25.4 million at the end of ’15 to $2.8 million at the end of ’16. We discussed a lot of the cash uses around acquisitions and other elements of the business, and in the 20-F report there will be a cash reconciliation where people can keep track and look into more detail on that aspect.

At this time, we would like to open up the call to questions and answers..

[Operator instructions] Our first question comes from the line of Rob Stone with Cowen & Company. Please go ahead with your questions..

Hi guys. I have a couple of questions. The first one is the press release indicates that you’re expecting revenues above $8 million in Q1 of ’17, gross margins were a little bit below 12% on a non-GAAP basis in the second half ’16 results, and you mentioned that there was one project with essentially no gross margin.

What color can you provide on the expected margin profile for Q1?.

Yes, you’re right. I did not--to answer the question, I didn’t have a chance to see on the prepared remarks that we do have--from the information available to us today, have an outlook for surpassing $8 million in revenues for Q1 of 2017, which represents growth of roughly 35% year over year.

At this time, we have not yet finalized the financials for Q1, so it’s a little hard to give you specific detail on the gross margin.

There was some impact from that government customer as well in Q1, I’m talking about the customer which was impacted by increased import tax, but there’s other things that are in Q1, such as the new project in Colombia and others, which will help significantly improve gross margins as well as operating efficiencies and improvements, which were very hard to see last year, 2016.

But in 2017, in Q1 and going forward, our expectation is that a lot of things will clean up and gross margins will be higher..

So besides the import tax in one country for that major customer, where there other factors that depressed the gross margin in the second half of ’16? It’s considerably below what we thought of as sort of your target margin model, so what else was going on?.

Okay, sorry, I have a cold, so it’s going to be very difficult to hear my voice. In general, what you see here is that the results in six months, we have consolidation or cost of goods from our new subsidiary. A lot of them had some change in inventory from [indiscernible] require them.

At the end, we had some clean-up to do in most of them, and what you see, that we have very low revenue from those subsidiaries, almost nothing. On the other hand, we had the cost of goods [indiscernible] and labor that are all in, and these really affected the gross margin of the whole group.

You should look at SuperCom [indiscernible] compared to last year, the gross margin would be much better than that.

We believe that [indiscernible] clean up with inventory and some other issues with the new subsidiaries [indiscernible] end of the year, you can see that being affected in those numbers, and we start the fresh year with all subsidiaries [indiscernible] in for the next year, so I expect to not see these kind of fluctuations constantly in the future.

On the core [indiscernible], we see already in the first quarter that we just concluded that we are back to very high revenue, and our gross margin is going to be similar to what we used to have in the past at SuperCom.

Although we have a consolidation, we will try now [indiscernible] to give some information on sectors, which will be easier for you to analyze it and do predictions for the future. Each sector will have a different type of gross margin as its peer.

The [indiscernible] e-government has a multiplication of current revenue margin of 80%, the cyber security has 80%, but on the connectivity we will see a number which is around 50% just because it includes also a lot of hardware and contracts.

So I think that once we will--you will have our audited years’ filing, you’ll see more information about the gross margin in each sector..

Okay, that’s very helpful, thank you. With respect to operating expenses, just taking the second half ’16 non-GAAP number if we loaded it level into the two quarters, it looks like the run rate is around $4.1 million per quarter.

You mentioned consolidation and cost reduction, so how should we think about the quarterly run rate for non-GAAP expenses this year?.

Okay. First of all, the real operating expenses [indiscernible] the R&D segment and G&A, the number was higher in the second half of the year, however was offset by a one-time [indiscernible] that we had this [indiscernible] to take it out, the number is higher, it’s about [indiscernible] that we’re pretty sure that we have addressed here.

Our R&D is very, very high - we’re talking about $6.7 million for R&D that was somehow [indiscernible] for us, somehow aligned products from this division into our product line offering. These numbers will be reduced dramatically and we believe the R&D is going to be reduced to a level of about similar to year as we [indiscernible] in the past.

Total marketing and G&A should be [indiscernible] as well and we believe that our goal is to reach operating margin to be between $3.6 million to $4 million for the coming year..

I’m sorry - operating margin or operating expenses?.

Sorry - operating expenses. Sorry, sorry..

Yes, okay, so $3.6 million to $4 million on a non-GAAP per quarter basis?.

Correct, correct. .

Okay. My last question is with respect to the cash position, which was relatively low on the Q4 balance sheet. You had a little over $11 million receivables.

Can you provide any comment on the direction of the cash position since then?.

Yes, okay. Obviously we cannot disclose the level of cash we have today, but I’ll say that we passed the lowest point from a cash flow point of view management last year, [indiscernible] acquisition investments [indiscernible] and we are back in fact of [indiscernible].

We are also collecting a lot of the receivables and I believe about 40% of [indiscernible] we had at the end of the year [indiscernible] already be collected.

So we expect the cash level to grow at a nice growth level, and we believe to reach a level of at least $10 million of cash flow just from [indiscernible] at the end of third quarter or fourth..

Great, that’s all I had. Thank you..

Thank you..

Thank you. This concludes our question and answer session. I would like to turn the floor back to management for closing comments..

Okay, thank you.

Though our financial performance for 2016 was below what we all wanted it to be, however I hope you can see our revenues are now more diverse, our customer base is more diverse, our technology platform across all divisions is exceptional, and we are making good strides in effectively cross-selling our capability to drive sales as well as efficiency.

We are confident that we are making strategic progress and this progress will be reflected in our financial results going forward. With that said, I would like to thank you all for joining the call, and we’ll be happy to see you back in our conference call for the first quarter. Thank you..

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation..