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

Tony Pollock - Aegis Capital Brian Kinstlinger - Maxim Group.

Ladies and gentlemen, thank you for standing by. Welcome to SuperCom’s first quarter 2017 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 result 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 question.

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 cannot 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 systems 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, 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 that the non-GAAP financial measures provided are useful to investors understanding and the 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 the core operational activities of the company.

However, such measures should not be considered in isolation or as substitute for results prepared in accordance with GAAP. Reconciliation of the non-GAAP measures to the most comparable GAAP measures are provided in the schedules attached to the earnings release. So, at this time, I would like to turn the call to Mr. Trabelsi.

Ordan, the floor is yours..

Thank you. And good morning, everyone. We are excited about the progress we made in Q1, which in many ways is a breakout quarter for us and begins to reflect our transformed business model. We announced fiscal 2016 results three weeks ago. And what a difference you can see just three weeks later.

We’re also continuing to make progress reporting our results on a more timely basis, which is a top priority for us. Given we just had our year-end call, we will try not to be too repetitive and focus more on the quarter's financial results and recent operational highlights.

While there have been a lot of changes, acquisitions, and expansion at SuperCom over the past 18 months, I want to spend a moment on something that has stayed the same, the nature and characteristics of our customer.

A unifying characteristic of SuperCom’s customers is the heavy burden they carry in selecting the technology to secure and protect millions of people in their nation or thousands in their enterprise.

As the chief security officer and decision-maker, one missed detail, one misunderstood concept, one poor decision, and the ramifications can be catastrophic. And in the unfortunate developments in our global community today, the stakes are higher than ever.

While these customers are highly discerning and it requires significant resources to attain, they provide immense value with their unparalleled loyalty and stickiness. And it has taken SuperCom not 1, not 5, not even 10, but 29 years to learn and reach this level of service for this unique customer.

Through extremely challenging nationwide technology deployments and multi-decade relationships with governments that persist through multiple elections and leadership changes, we have developed a specific DNA at SuperCom.

Our entire organization from sales and marketing to customer support and supply chain management to operational structure and research and development is based on this DNA and our goal to build trust and properly serve the needs of the chief security officer in a government or enterprise.

Confident in these core capabilities and infrastructure, we decided to expand, making three key improvements during 2016 that we expected would bear fruit and drive sustained growth and improved profitability. One, we have dramatically expanded and improved our addressable markets.

We’ve expanded from being primarily a secure electronic ID company to being a global provider of advanced identification, tracking, and digital security solutions across multiple high-growth markets.

These markets share common characteristics of high growth rates, significant recurring revenue opportunities, and attractive margin dynamics, with high barriers to entry, and of course, the same unique customer characteristics. Two, we've grown our technology and IP. We started 2016 with seven patents and today have 119 patents globally.

With an expanded department of expert scientists and cyber security engineers, we deploy an array of cutting-edge security products and solutions such as biometric passports and IDs, border controls and voting systems, geographical information systems, active RFID tracking and monitoring, and port and device protection and hard disk encryptions, cyber engineer platforms for mobile and servers, secure mobile payments, and all-in-one point-of-sale, encrypted secure Wi-Fi and WiMAX communications and much, much more.

Three, we've dramatically diversified our customer base and pipeline. In 2014 and 2015, we had a customer base consisting mainly of national government customers, with most of our revenues deriving from only five main customers.

Today, we have a base – a customer base of approximately 30,000, including national and local government and enterprises across many markets, including finance, retail, telecom, and infrastructure. Furthermore, we are making progress shifting to more recurring revenue from more customers in developed nations.

With more diversified markets, enhanced technology solutions, and significantly broadened customer base, we have started to work on what our management has done well time and time again since joining SuperCom five years ago, and that is optimizing and streamlining our operations and cost structures.

Now, we’re beginning to realize better financial results. We still have a lot of work to do, but the first-quarter results demonstrate that we are on track. Let me provide an overview of the financials. Our revenue grew 42% from Q1 of last year.

In Q1 of 2017, we realized $8.3 million in sales, only $1.1 million below what we realized for the entire back half of 2016. The revenue growth in the quarter came across our divisions. Of note, we saw growth from our EID division, including revenue from deployment of one of our new LAND GIS projects in Colombia.

We saw growth in our M2M [ph] and cyber divisions and growth in our contribution from the US. We are tracking towards our expectation of achieving at least $35 million in revenue for 2017. With this revenue increase, our gross margins improved dramatically.

We saw non-GAAP gross margins of 39%, more than double our non-GAAP gross margins in the first quarter of 2016 and significantly above the 11.6% non-GAAP gross margin that we realized in the back half of 2016.

It is important to point out that gross margins in the first quarter were impacted by a temporary Ecuador import tax, which has impacted our margins also in some of the recent quarters. Without this import tax, our gross margins would've been higher in the first quarter.

With deployment of this add-on project concluded in Q1, we do not expect this import tax to impact in upcoming quarters as these revenues are replaced by other revenues of higher-margin.

In terms of non-GAAP operating expenses, the three core operating expenses – R&D, sales and marketing, and G&A – each came down as the percentage of sales, demonstrating that we are realizing the cost reductions and efficiencies across our business that we expected.

R&D was $1.68 million or 20% of sales, similar to the 20% of sales in the first quarter of last year. But on a sequential basis, our R&D came down on both an absolute and percentage of sales. The average R&D expense in the back half of 2016 was approximately $3 million per quarter.

R&D is critical for us, but we are being very strategic in our R&D investments and focusing on the highest potential ROI areas. Sales and marketing was $1.9 million or 23% of sales compared to 33% of sales in Q1 last year. Selling and marketing also came down significantly on a sequential basis.

The average selling and marketing expenses in the back half of 2016 was $2.7 million per quarter compared to $1.9 million this quarter, of Q1 2017. Finally, G&A for the quarter was $1.6 million or 20% of sales compared to 27% of sales in Q1 of last year. The average G&A expense for the back half of 2016 was $1.9 million.

So, you can see the cost reductions we’re driving in the business. Note, we also had $400,000 in other income, mainly attributed to collections beyond expected levels. EBITDA for the quarter improved to negative $760,000, a negative 8.5%, a significantly reduced loss and improved margin compared to 2016.

We are on a clear path to regaining EBITDA and ultimately net profitability. Now, let me briefly provide some quarterly performance details from each of our divisions. First off, ∑ID.

We continue to make progress on our $9 million secure LAN geographical information system project in Colombia, and this project’s deployment remains on track and transition to steady-state revenue in July 2018 – on track to be completed and transitioned July 2018.

One of our large-scale ∑ID deployments in Africa has transitioned to the steady-state, generating recurring revenues that contributed to our improved first quarter gross margin performance and we are on track to complete the transition of another large-scale deployment during 2017.

During the quarter, as previously announced, we were awarded a $3 million contract to provide various core elements of our flexible electronic ID solutions. We are making progress on our existing projects and also focus on converting our sales pipeline from contacts to contracts.

We offer complete end-to-end in-house solution for credentialing, identifying and verifying individuals by combining the capability to support biometric identification with the portability of smart cards.

As discussed before, in the business, as we compete for and win larger, more strategic opportunities, we’re more susceptible to increasingly common industry practice of competitors challenging tenders.

These challenges can delay the negotiation and award process, but we remain focused on demonstrating that our innovative technology and service solutions are the best choice for our potential customers. Let’s move on to the MTM division.

During the quarter, we saw continued demand for our electronic monitoring offender tracking capabilities in both developed nations and emerging markets.

The public safety for electronics monitoring and offender tracking is projected – the public safety market is projected to grow in excess of $6 billion by 2018, representing a tremendous opportunity for potential growth.

We believe that personal and asset management are now leading security concerns in commercial and government enterprises, and that this should drive an increased demand. Our wireless ID-enabled security solutions provide an optimal solution to reliably identify and track the movement of people and objects in real-time.

Among the developments in the division in the first quarter are, we won an additional competitive RFP processes in Europe, marking our current win rate for electronic offender monitoring projects in Europe at over 60%, a higher win rate than we've had for any of our technology divisions in any of the continents in the recent past.

Furthermore, we have an active bid pipeline in the MTM division of over $100 million around the world, giving us confidence in our prospects to drive growth in this business.

We are aggressively expanding the market recognition for our peer security offender monitoring suite of services and have been awarded projects in seven new countries since the summer of 2015.

We are focused on continuing to increase our peer security presence in North America where we currently have deployments in Ohio, California and Canada through partnerships with leading local based electronic monitoring service providers.

During the quarter, as previously announced, we were selected by the Czech Republic's Ministry of Justice for a $3.7 million national electronic monitoring contract. Finally, in March, we were awarded an EM contract in Ontario, Canada valued at up to $1.7 million.

Also, one of our competitors in the space, 3M's electronic monitoring division, was recently sold to a private equity firm, which we view as a positive, given 3M lived up to their reputation as being notoriously litigious and constantly appealed our awards, particularly in Europe.

We remain focused on and active in piloting and bidding on contracts in other states and other countries and we are seeing a growing pipeline of new opportunities.

Lastly, in the cyber and connectivity divisions, Safend, part of our cyber security division, continued to restore its global distribution channels and relationships with sophisticated Fortune 500 enterprise.

We now have a platform of thousands of sophisticated enterprise customers, which run a proprietary endpoint protection software and utilize our cyber security services.

Through this platform, we hope to more easily deploy additional innovations in cyber security, such as our proprietary safe mobile security software to high quality enterprise customers.

As most of you know, last year, we acquired Alvarion, a provider of autonomous Wi-Fi networks and solutions for carrier Wi-Fi, enterprise connectivity, smart cities, smart hospitality and connected events.

With this strategic addition, we picked up production facilities, an inventory management system and an international sales organization, which we have since recognized to better leverage cross-selling opportunities with other SuperCom entities.

For example, Alvarion and Safend have collaborated to launch a secure Wi-Fi platform for enterprises, creating a trusted platform to fight cyberattacks and malicious entry into private networks. We continue to make progress with VeloPOS, our secure point-of-sale platform, and SuperPay.

The technology developed and used for each of these solutions can be used to complement and support solutions across our portfolio and is proving to be a competitive advantage as we work to grow our customer base.

During the quarter, we also made progress with the rollout of our mobile e-wallet solution we launch with VeriFone and Nofshonit, one of Israel’s biggest loyalty cards. As we all know, the e-wallet market opportunity is huge.

We have a good solution with good partners and we only need a sliver of this market for it to make a significant impact on our results. With that, I’ll now turn the call to Arie..

Thank you, Ordan. I’ll close by saying that our first quarter results show dramatic improvement in both revenue and margin performance and we look forward to building on this progress through the balance of the year. We’re focused on developing a baseline of steady-state or recurring revenue, with an improved mix of customer in high-growth markets.

During the first quarter, we began to realize the [indiscernible] efficiency across the organization as promised.

We still have a lot of work to do, but with the first quarter completed, and our ability today, we believe we are well-positioned to drive long-term growth and remain comfortable in our belief that revenue for the full year 2017 will exceed $35 million. With that said, I would like to open the call for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of James Mendoff [ph] with Cowen & Company. Please proceed with your question..

Good morning. Can you hear me? Good morning.

Are you able, at this point, to provide some segment detail in terms of revenue for the different – for the four segments?.

We’re doing it only twice a year in the half year or the semi financial report and on the annual report, so not provided on a quarterly basis. And because we did not put it out on the PR, I don’t think we’re going to put out this segmentation here on this call..

Okay, thanks.

And then, in terms of the revenue as it unfolds through the year, how does the seasonality play out this year?.

No. The good thing about what development we had during the last year that – we have four growth engines with [indiscernible] that somehow smooths any seasonality and we believe that we will see going forward a growth in our revenue and we’re not expecting any seasonality..

Okay, thanks. And then in terms of gross margin, it came in significantly better than we had been looking for. And so, congratulations on that.

And the question is, how – what were some of the drivers behind that 39% non-GAAP gross margin and how much of a drag was Ecuador? In other words, how much gross margin might be possible later in the year?.

Okay, yeah. First of all, we had this Ecuador with negative gross margins completed in the first quarter. So, we do not have any similar contracts or projects with this kind of gross margin. We have right now our … Okay, hello..

Hello..

Yes, okay. And what remain with our contracts and revenue with the mix that we believe we will see an increase in gross margin going forward. I think our goal is to have more and more revenue from our recurring revenue, although we call it steady-state revenue, which has a very high margin.

And we believe that, starting second quarter, you will see a large improvement in our gross margin going forward, and we expect to see a much better gross margin on every quarter going forward until we will reach some of our historical gross margin..

How much of a drag was Ecuador in the first quarter?.

We haven’t shared the specific percentage, but that project, as we said –.

I would just say that, without this project or having a replacement with similar contracts we have in line, I think that our gross margin will be higher by more than 5%..

Okay, great. Why don’t I get back in the queue and see maybe if I come back later with some more questions? Thanks..

Thank you..

Thank you. Our next question comes from the line of Tony Pollock with Aegis Capital. Please proceed with your question..

Hi there.

Could you go into a little more depth on the research and development? I see they went up about $0.5 million, where that is and what type of return on investments you expect and how soon we can expect a return on investment on that?.

Okay. First of all, as you can see, along the years – the last four years and beyond, we as a company invested a lot of our resources in R&D. Originally, it was in the ∑ID or the government area. And that’s when we developed a new line for the M2M and going forwards.

Last year, we invested over $8 million in R&D, some of it capitalized, and the other is on our P&L. We’re not going to see this kind of investment in R&D this year because we somehow have put together the right product line, the right interface between them, so we believe the R&D will go down to half of this level of last year.

We invested in ∑ID, M2M, cyber security, and connectivity. On the connectivity, our main development is to have our connectivity products secure, so we took IP and specific algorithms from Safend together with access point algorithm that Alvarion has, and we developed a unique secure Wi-Fi product that we believe will be a great, great growth engine.

On M2M, we continue to develop and to enhance our product line to a more and more market, and we see an excellent feedback from our customers, in most of the cases, when we go into a tender or we show our product. Our customers are very happy with our technology and the way we build it around the customer.

And on the ∑ID and on the LAN, which is part of the e-government, we enhance our product with our platform, with the Magna platform. We had more and more modules and we have today a more scalable modular platform that works together with all the other component that we [indiscernible] division.

With the cyber security, we continue to invest in our [indiscernible] mobile solution, SafeMobile, in our product [indiscernible] endpoint protection that we have [indiscernible]..

Okay.

It sounds – can we expect $1.5 million to $1.7 million in R&D for the quarters going forward or is this a higher quarter than normal?.

We believe our goal is to reach $4 million R&D investment this year, which is about half of what we had last year because of transition year. And I think that it is about the level that we believe we’ll continue to see going forward.

We do not need as much R&D as we had in the last two years when we build our product line, when we [indiscernible] working together. And we believe that the level of R&D should go to a normal level that the company in our size, supporting that product and interfacing that a new technology should have..

Okay. One other question, you talked about you’re getting a lot more business from corporations versus governments.

Could you quantify that in terms of this quarter or going forward?.

Let me answer that one. If you look at the 20-F for 2016, you will see that there’s segmentation provided towards the end. Out of the $20 million, roughly $3 million or so of recognized revenues was from the connectivity and cyber divisions. The vast majority of that is enterprises. So, we’re roughly at 15%.

We’re expecting those numbers to potentially grow throughout the quarters, but it depends on, of course, the projects that come in to different divisions. But on a steady-state level, that’s around the number where we’re at..

Okay, thank you. I’ll get back into queue..

I just would like to mention. Our connectivity business, together with the cyber security business, aiming to enterprises around the world, those two growth engines, we’ll see more and more revenue coming from enterprises along with the growth that we have on the M2M and ∑ID.

So, I think the number that we have seen last year are going to improve this year toward cyber security and connectivity or revenue from enterprises around the world..

Okay, thank you..

Thank you. Our next question comes from the line of Brian Kinstlinger with Maxim Group. Please proceed with your question..

Yeah, great. Thanks. If we took a three-year kind of outlook, which of your four businesses do you think will generate the most growth over those years and maybe which of your businesses might be a little bit slower? Thanks..

Okay. First of all, if you look at our four growth engines, first one, ∑ID or the government, it is our legacy. This one is characterized by nice steady-state revenue, together with the large contracts that we’re bidding on.

And in this case, we can win a very large contract and we will see a different picture from revenue point of view for this division. And in general, the size of those contracts are very high. Two years ago, we had two large contracts that aggregated to about $50 million together.

The other area which is probably one of the promising growth engines we have, the public safety, we see the – also very large contracts with government or municipal contracts or tender that again can range from a few hundred thousand dollars, but also can reach €50 million.

And here, again, each contract like this gives you a large revenue for many years and you have the contract about five years, plus additional five years as an option. So, it’s really a very nice stream of revenue from very strong customers, governments or counties in the US.

We believe that the M2M is going to be a very fast-growing engine for us, both because we had very good success of integrating a lot of our great technology. And the other is, again, there is a large demand to this kind of solution in the US, Europe and around the world. So, we are – with the right solution, on time for that.

The other two growth engines are [indiscernible] and they are providing us a few million dollars each at this stage, but we do believe that the cyber security division will become very meaningful in our revenue because more and more government and enterprises are looking for cyber security solutions that we have already outstanding reputation with already have thousands of customers, including large enterprises, on the board that are using our product.

So, they have continued to renew licenses with us and ask for modification or upgrade. And we are building on that [indiscernible] more cyber security product to them In addition to that, we’re adding this mobile – a safe mobile product which is somehow complement the cyber security that we have on the Windows and other desktop or portable unit.

We believe we will see a nice growth of 20 to 30% per year on this division as well. The connectivity area, as we all know, it’s a very large market. We’re talking about a market that’s about $16 billion per year for our point to point and secure Wi-Fi product.

We believe that among the few vendor around the world that have a complete one-stop solution that provides both a Wi-Fi – secure Wi-Fi solution together with point-to-point communication, which can bring to [indiscernible] Wi-Fi coverage in a relatively short time and we believe that once we complete our sales and marketing structure, to have it around the world, we do believe that we will start gaining more and more market share.

And even 1% of this market share can be can be reflected with $116 million [indiscernible] I’m not saying that we’re going to be there, but I’m just saying the market is very, very large and a very small success there provides you with a very high revenue.

So, we do believe that two years from today, the connectivity is going to be a major revenue engine for our company.

So, if we look at all these four engines that we have, we have two that provide us with a very long-term contract with government that provide us a very nice visibility for a few years, 5 or 10 years, with revenue from the government on one hand.

And on the other hand, we have two engines that work mainly with enterprise around the world, providing secure connectivity and cyber security, and we believe that the very large demand to this product would drive our revenue very fast there.

So, we have the mix of long-term contracted with government, with a much short-term – short-cycle sales with enterprises, with the very loyal enterprises around the world that are renewing licenses and even acquiring product from us. And we’re very optimistic about capitalizing on that..

Thank you..

Thank you. This concludes our question-and-answer session. I would like to turn the call back over to management for closing remarks..

Okay. Thank you for joining us today. We’re looking forward to meet you next quarter, which we believe is going to be relatively soon. Thank you again..

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..

Thank you all..