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

Rob Stone - Cowen and Co Tony Pollock - Aegis Capital C Brian - Samba Capital Kevin DV - Robert and Shaw Justin Bars - Progress Partners.

Ladies and gentlemen, thank you for standing by. Welcome to SuperCom’s Second 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, 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 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 in the earnings release. So, at this time, I would like to turn the call to Mr. Trabelsi.

Ordan, the floor is yours..

Good morning. And thank you for joining us to discuss our second quarter 2017 results. This is a strong quarter for SuperCom continuing the momentum we began to see last quarter to deliver exceptional results.

Compared to second quarter of 2016, gross margin have increased 70%, SG&A costs are down 13%(18%, see press release), and for the first time in several quarters, we’ve achieved positive Non-GAAP EPS and EBITDA, important milestones in our business plan and recent transformation.

Our recent achievements include, one, driving growth in developed countries, a focus of ours has been to diverse our revenue away from developing countries and increase revenue contribution from developed countries and enterprise businesses.

To that end, just after the close of the quarter we are very excited to announce two new contracts awards in our M2M division. One for pretrial and court services as well as electronic monitoring in Alameda County, California. And other a contract with the Ministry of Justice in Denmark to deploy our Pure security electronic monitoring C.

I'll provide the details of these contracts a bit later in the call. Two, driving steady-state revenue which is a crucial metric for us as steady-state revenues refers to our most stable and predictable revenue. Most of which is repeat business or recurring from existing customers in our various business lines.

Whether the source is software maintenance, ordering of consumables for card production or daily rate built on total offenders being tracked and monitored. This revenue is much more reliable and predictable in nature and forms the base of our businesses.

Over the past years, we've seen a consistent increase in steady-state revenue from approximately $12 million to $15 million to $17 million in 2014, 2015 and 2016 respectively. And we are experiencing further growth to steady-state revenue as well in 2017 and as well in the second quarter.

Three, leveraging the strength of our technology across our businesses. We made several acquisitions last year. With these acquisitions came invaluable technology and expertise. We have multiple business segments. But these segments have a distinct advantage of being able to share technology to better serve customers.

The breadth of our offering is becoming increasingly evident to our customer and our main customer the chief security officer of an enterprise or government body. Four, and as we mentioned early, we saw significant operational efficiencies gain traction as we integrate the acquisition we execute in 2016. Gross margin increases significantly.

We continue to see reduction in operating expense to percentage of sales return to much waited for profitability status with positive non-GAAP EPS and EBITDA. And we are well positioned to sustain this and grow margins further as we continue to perform on our plan.

As our second quarter result demonstrates, we are continuing to gain traction with an implementation of expanded business model that positioned us as a low provider of advanced identification, tracking and cyber security solutions for high end growth markets.

We are broadening our reach to operating market that offers more opportunities for us to generate recurring revenue with good margin and also great barriers to entry. Additionally, we are growing our portfolio of IP technology solution to ensure that we can deliver the cutting edge security products that our customers demand.

We've a diversifying and growing customer base of approximately 30,000, which includes national and local governments and enterprises across many markets including finance, retail, telecom and infrastructure.

We remain focused on understanding and anticipating the needs of core customers as they seek solutions to maintain a security of their corporate enterprise or their country. Through our long history as a company we built technologies and services to effectively protect both people and information.

And that expertise enhanced our reputation a reliable security resource and partner, which has resulted in developing long term and valuable relationships. Now let me provide an overview of our results. Financial results for the second quarter of 2017. Revenue grew 50% from Q2 last year and we saw growth across all our divisions.

Of note, we saw growth from our e-ID division, including revenue from deployment of one of our new LAND GIS projects in Colombia. Growth in our M2M and Cyber Divisions and growth in our contribution from the US. With this revenue increase, we also saw significant gross margins improvement.

We saw non-GAAP gross margins, up 49% compared to 30% in the second quarter of 2016. In terms of non-GAAP operating expenses, three core operating expenses R&D, sales and marketing, and G&A, each came down as a percentage of sales, demonstrating that we are realizing the cost reductions and efficiencies across our business that we expected.

R&D was $2 million compared to $1.5 million in the second quarter last year. 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 $2.3 million or 31% of sales compared to 51% of sales in Q2 last year. Finally, G&A for the quarter was $1.5 million or 20% of sales compared to 37% of sales in Q2 last year. For the first time in several quarters, we achieved non-GAAP EPS of $0.03 or $0.02 compared to negative $0.04 in Q2 of last year.

Additionally, EBITDA for the quarter improved dramatically to gain $0.8 million, compared to a loss of $0.34 million in the prior year period. Our balance sheet is strong with $470,000 in long-term debt and our cash position improved sequentially to just under $1 million.

We also saw a sequential decrease in our receivables from $11.8 million in Q1 to $10.7 million. And $470,000 I apologized is short-term debt. Now, let me briefly provide some quarterly performance details from each of our divisions. e-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 to transition steady-state revenue in July of 2018.

One of our large e-ID deployments in Africa has transitioned to the steady-state, generating recurring revenues that contributed to our improved performance and we are on track to complete the transition of another large-scale deployment in the near future.

We are pleased with our progress on our existing projects and focused on converting our sales pipeline from opportunities to contracts.

Our complete end-to-end in-house solution for credentialing, identifying and verifying individuals using biometric identification combined with the portability of smart cards remains a compelling and comprehensive solution in the marketplace.

Through our core magnum multi module technology, we can provide on platform a complete end-to-end solution for electronic passports, national ID cards, photo identification card, driver's licenses and more.

Our solutions converts everything necessary for our customers to offer a particular services to the public including business process engineering, solution design and integration, hardware and software implementation, operator and technician training.

We pursue both large and small projects with a goal of increasing the predictability of the business, and we also work closely with our existing customers to realize opportunities for additional programs or projects.

As we've discussed before, as we gain marketplace recognition in this business and compete for and when larger and more strategic opportunities, we are more susceptible to the common industry practice of our competitors challenging tenders.

These challenges can delay the negotiation or work process so we focused on opportunities at hand and on demonstrating that our innovating technology and service solutions are the best choice for our potential customers.

In our M2M tracking division, we are seeing growing demand for our electronic monitoring for offender tracking capabilities in developed nations and emerging markets, as our advanced active RFID and smartphone security solutions continue to prove themselves as optimum message for reliably identifying and tracking the movement of people and objects in real time.

Security concerns both commercial and governmental enterprises are on the increase worldwide, further driving demand for our state-of-the-art solutions to public safety market for electronic monitoring and offender tracking is projected to grow in excess of $6 billion by 2018.

We are poised to take advantage of this significant opportunity for potential growth. As I mentioned earlier, we announced two important contract wins for this division just after the close of the quarter.

First, our Leaders in Community Alternative or LCA subsidiary in California was awarded a new contract valued at up to $3.4 million to provide pretrial and early intervention court services, as well as electronic monitoring services for the Alameda County Probation Department in Northern California.

We are particularly pleased to have won this award because it is a new and additional program from our existing partner. LCA currently work with Alameda County on its day reporting program, which has been operating since 2015.

Under the contract for the new program, LCA will run a comprehensive pretrial and early intervention program providing evidence based and individualized programming paired with electronic monitoring service that contribute to reduction in recidivism.

The program utilizes GPS tracking and surveillance solution tracking those in the community who are going trial. We believe our proven capability and successful performance on similar contracts in California contributed to LCA's selection in Alameda.

Secondly, we've recently announced signing a multiyear national electronic monitoring contract with the Ministry of Justice of Denmark for the deployment of our peer security electronic monitoring suite.

This contract was won through a competitive bid process with industry veterans and displays a large incumbent who held the contract for the past 12 years.

This win is another testament to the quality of our product services and technology and demonstrates that more and more governments around the world, your solution is superior one for electronic offender monitoring. The contract is spread over four years including an initial deployment period following by 43 months of ongoing service.

The budget consists mainly of cost for purchasing electronic monitoring system and equipment as well as recurring maintenance and support charges. We expect to deploy the program and begin generating recurring revenues within the next three months.

This comprehensive nationwide program will encompass all electronic monitoring or EM of offender programs within the country at Denmark. And is expected to eventually monitor up to 1,000 enrollees simultaneously beginning with approximately 500 enrollees in the initial deployment period.

This deployment of our Pure security electronic monitoring solution will include home detention and monitoring inside designated departure facilities.

With the strong market demand for EM technology and products, we see significant near and long -term opportunities to further expand our presence in this market and are actively bidding for EM projects in the US, Europe, Latin America and Asia.

As a success of our solutions gain recognition in the marketplace, our opportunity pipeline is growing and we are intent to converting these pipeline and bid opportunities into word of contract.

In our Cyber Security division, during the second quarter Safend continue to make progress strengthening its global distribution channel, a relationship with sophisticated Fortune 500 enterprises. Sales booking grew significantly from Q2 of last year.

We now have a platform of thousands of sophisticated enterprise customers which run our proprietary and point protection software and utilize our Cyber Security services. Through this platform, we hope to more easily deploy additional innovation in cyber security to high quality enterprise customers.

The frequency of ransomware attack and Advanced Persistent Threat or APT where our network is attacked and an unauthorized person gains access to a network and stays there undetected for a long period of time with intend to stealing data is on the rise with some recent high profile attacks.

The traditional anti virus technology unfortunately covers only an estimated 45% of attacks. And as proven quite ineffective in many scenarios against ransomware, APT or zero day attack. This is only increasing the importance of our innovated solutions.

For example, we've recently entered significant research development progress in our anti malware, anti ransomware and APT prevention solutions.

These new edge products are still in POC stages but in simulated environment have shown very effective blocking the recent attacks that hurt many enterprises such as the high profile WannaCry cyber attack in May of this year.

Connectivity and payments division, as we discussed before, 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 campuses and connected events.

With the 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 new secure Wi-Fi platform for enterprises.

We've recently began selling Alvarion Wi-Fi and backhaul technology successfully in the US market including setting up new distribution, integration and marketing channels. And an inflow of new purchase order has arrived from the US market, a market with significant potential and demand.

VeloPOS, our secure point-of-sale platform, and SuperPay continued to be sold to customers as standalone projects and products. And 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.

In this quarter we added and began selling to two new large customers in Central America and in United Kingdom. With that, I'll now turn the call over to Arie. Arie please. .

Thank you, Ordan. We are very pleased to have continued the momentum of our first quarter deliver continuing for making our second quarter revenue and margin performance.

Our focus on increasing our exposure to recording revenue opportunity with more diverse customer in high growth market, coupled with our initiative to realize operational efficiency are beginning to bear fruit.

We [Indiscernible] day, we believe we are well positioned to drive long-term growth and we remain comfortable in our belief that revenue for the full year term will increase $35 million. With that said, I'd like to open the call for questions.

Operator?.

[Operator Instructions] Thank you. Our first question is from the line of Rob Stone with Cowen and Co. Please proceed with your question..

Hi. I apologize if you already covered this in the prepared remarks. I got on the call little bit late. But the first question I had is you are reaffirming the expectation for $35 million or better in total revenues for this year. I'd rather disrupt sharply on a year-over-year basis in Q2 but they did decline sequentially.

So if you could comment on what was -- what factors were behind the sequential decline and then to the extent you have visibility -- how do you see the second half coming in terms of linearity to get to your $35 million? ..

Okay. First of all, we'll like to compare to look at the second quarter revenue which was a little bit lower than we had in the first quarter, just as a change in one off our quarter that will be complete in the third quarter. I'd say that our expectation to have between $9 million to $10 million EBITDA each of the next two quarters.

So we are very, very comfortable with the guidelines of $35 million that we've already. .

Okay. Then in terms of just project timing impact, Arie. .

Yes. .

Okay. Ordan you had something else. .

No. I was just going to add on as you suggested the projects percentage of completion and ordering of cards and otherwise can fall a little bit different between the quarters. We don't expect always have sequential growth. It could be a little bit down, little bit up based on how the orders falling throughout the year.

But with what we have currently and able to see for the rest of the year is what supports our guidance. .

Yes, okay. My second question is on gross margins which were also substantially better and above what we are modeling. I think it was what 49% on non-GAAP basis. So again any commentary you might have on the factors contributing to margins in the second half up down or sideways. .

Yes, okay. So first of all, what we see the mix of our revenue -- we have larger part of our recurring revenue on the government product and solution with more sale of software company or cyber security company which bear very high margin.

And if you look at the overall mix we see almost 30% gross margin and we believe this number is going to grow more towards the end of the year. We were expecting to see those numbers. .

So there is room for further margin expansion in the second half you are saying. .

Yes. .

Potentially and also expect there can be again some movement of the gross margin based on the different orders as they fall in from a different business division throughout this quarter..

Yes. And then finally you still recorded fairly significant contract expenses in the quarter, it was sort of $2.3 million and I know you were working to rationalize and reduce operating expenses where possible.

So how should we think about the complexion of expenses in the second half? The net result notwithstanding somewhat lower revenue than we model was positive EBITDA and earnings for the quarter so that's good. But a chunk of that was from contract expense. So any color on the expense trends would be super helpful. .

Okay. First of all on the expense, one major expense which we believe is not truly an expense which is in investment is our R&D, R&D was increased almost as million dollars compared to previous quarter or just $10,000 if you compared to last year.

On the selling and marketing, we've an increase mainly due to commission of some of our growth our revenue and we believe that our G&A will continue to go down.

And we believe that now in the second half of the year when some of our R&D programs are completed we'll see a decrease to the level of $1.4 million -$1.5 million R&D in each of the next two quarter while our G&A will go down.

If you compare it to the percent of revenue in the next two quarters, we'll see a dramatic decrease there because we are looking at $9 million to $10 million in each of the quarter. So we believe that the SG&A is going to be dramatically lower than this quarter than previous quarter. .

Okay.

And what were the items behind contract expense this quarter?.

Just to clarify, you are talking about the $1.9 million other income? Yes, this is mainly a collection --.

I am sorry I am looking at the six months numbers, sorry, I apologize. .

So I think you were talking about $1.9 million of other income. .

Correct. But it's not at the -- not the OIE it's included in operating expenses $1.9 million. .

Yes, in general we are talking about some AR which were not -- were not on our balance sheet that we have collected or realized. And that's what we see here that our cash that we collected or to be collected in the next few weeks, that came in and were not our balance sheet..

Okay. And this is from acquired -- and this is mostly you are referring to acquired AR that was at the stress not necessarily anything written off from SuperCom in the past. .

Correct..

Right. So it's just like the timing of your earnings releases which have been delayed the last few quarters because of all the work you had to do to finish the integration of the businesses you've acquired. This is kind of clean up from previously written down receivables. .

Not necessarily. This is Ordan --.

It's mainly work when our receivable and some other contract that we have to work on to realize them and that we have done in the last six months being realized this quarter. .

And also I just want to clarify something. It's less a write-off that we had from our businesses but businesses that we acquired and receivables who are at discounted level because they were businesses acquired out of distress and we were able to collect more than the level than we had on our books. .

Yes, thank you for that, Ordan. So my question related to that item then is you published your Q2 results on a more timely basis now. Should we expect going forward that this sort of thing the contract expense and so forth is basically behind you, what we see in the OpEx category just normal expenses for the most part going forward. .

Yes. So from the reporting point of view, we schedule to report on a month -- and the last month is also every month following a quarter that's our plan. .

Within 45 days. But regarding the contract expenses, we are still -- there are still integration benefits like what you see here. We can't have this expectation on a timelines of that but potentially this is great for the company. So our benefits still to be gain from the integration of these assets into our business.

And some of them are our other incomes. .

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

Good morning.

Could you give us a little more color on the increase in the research and development? And why it's going to go down in the next few quarters?.

Yes, okay. As you know, we've a four different division with four different product lines. And some of them are -- it's our generic product like the government e-ID and M2M. Some other is divisions that we acquired in the last year.

And what we've done from last year until today, we try to call this product line into -- o interface with some of our platform. And some of the programs are in POC or pilot level so we believe most of the R&D on those program they are older so the level of $1.2 million in a quarter is going to drop to a little bit $1.5 million.

While our plan for the year 2018 is to go down to a level of $4 million per year R&D. We are almost done with most of our R&D planning which work to the product and would continue to do some improvement enhancement of our product line..

Okay. It's great to see the selling and marketing and G&A went down substantially quarter-on-quarter, that's good sign. Thanks. .

Our next question is from the line of C Brian with Samba Capital. Please go ahead with your question. .

Good morning, guys or good afternoon depending on where you are. I am happy to see the time you are reporting and hope this will be a trend for you guys going forward. I presume in your six months results that you are going to publish; you are going to have a breakdown of the revenues by business unit. .

Yes. Wisely file our interim financial statement that will have all the sector and geographical --.

Not business unit but the segments as you have seen the 20th.

Yes, okay. And on the other expenses where you are basically collecting more AR than what you had on the books.

How long do you expect that to continue on into the foreseeable future? Is that going to basically end here at the end of 2017 or is it going to continue in the 2018 as well?.

No. We believe that by the end of the year we got with all these collection or realization, our realization that we had on -- which are not on the balance sheet. I believe 2018 we will not have such variation. .

Okay.

And last question on the expenses, did I hear you correctly that you expect the run rate to be $4 million per quarter which means R&D, sales and marketing and G&A?.

No, I was saying that we expect our R&D level at $4 million per year in the year 2018, will go down to level of $1 million -- I was answering question about the R&D level. I said some problems are being at the final stage.

We will have a drop on the R&D expense in the next this year and we believe 2018 will go down to a level of about$1 per quarter which is about $4 million per year. .

Got it, okay. I misunderstood. Thank you. .

R&D expense no --.

Our next question comes from the line of [Kevin DV with Robert and Shaw] Please proceed with your question. .

Ordan, you referenced synergies between the different segments or operating groups.

Could you speak a little bit to that? And give us a feeling for how you see that $35 million playing out between the segments?.

Okay. So the different -- when you talk about segments, I want to think you are talking about the division of M2M or e-ID together with the Cyber or Connectivity and Payments. We have various synergies between the different divisions. For example, on the call we talked about the synergy between Alvarion and Safend.

There are other opportunities such as -- if you look at large supporting even there is many things required such as the payment capabilities, the Wi-Fi connectivity, the cyber security as well as identification. And in my thought you can see from our customer being interested in a ray of our products rather than just one.

So we are able as an organization to use the same direct sales force at the end and to integrate all other technology in the backend. That helps bring down our sales and marketing cost and also increases the value from any dollar spent from our team.

We've always try to make sure that main focus is through security, the chief security officer or tangent elements of that, ones who bring on a customer as the starting as this one, we want to be able to provide him complementary technologies which will help support much of his problems.

Regarding the cyber security division for example, Safend, a great that product we acquired last year with a very big customer base. We are able to take that platform which is on the end point; those agents on millions of end points are throughout the world.

We are able to enhance that by adding new and innovative technologies that we've developed in SuperCom against ransomware, against advanced persistent threat and we are able to do that very seamlessly with our customer base because they are already running our software rather than a new startup and they are very many in the field right now.

We try to go out to new customers and have a hard time getting this foot on the door. .

Okay, that's helpful. And then just on the $35 million.

Will you - can you give us a direction on where you think the largest contribution comes from?.

On the $35 million. Arie, if you can answer that..

In general I would say that majority of our revenue will continue to be from our e-Government division, together with M2M division as well that both of them are aimed at government agency around the world.

In addition to that, we see increased revenue from large enterprise of the world from both on connectivity and cyber security as well as other is growing very fast.

And we are unable to realize all the softer booking that we had in our booking the last year just because of the way US GAAP is asking us to evaluate but we are booking that we will be realizing the next four quarters.

So we believe in the year 2018 we will see a larger part coming from enterprise around the world and lot of part from the government contract. It doesn't mean that those numbers are going to go down on absolute numbers but as a percent of our revenue, we'll see an increase from enterprises in 2018..

Okay. So could we suspect that you will offer segment revenue breakdown for the quarters going forward in 2018 maybe. .

In 2018, yes, we will -- we are considering it and we believe that we will -- are to provide the segmentation for 2018..

In our annual filings we are already doing that..

Our next question is from the line of [Justin Bars with Progress Partners]. .

Hey, guys. Quick question here. You guys have done a really nice job diversifying your business into different segments. And it seems like we found a ditch on the single digit million dollar contracts with.

Is it fair to say these $20 million plus contract, we should just kind of write those off as far as they are too competitive for whatever reasons, they are not being handed out and we are just more focused on the $3 million to $10 million contracts and that's really not going to be a part of the core business going forward. .

No, no, no. First of all, we continue to evolve our pipelines, large tenders with very large numbers. I can say that we still have our pipeline in the last quarter, our proposal to a tender with well over $95 million. So those large tenders on the e-Government are still there.

It's taking longer to realize them, there are more and more cancellation and re-tendering but as we mentioned in the past, we succeed in building alternative window for our revenue both from enterprises and from M2M and Connectivity which provide a shorter sale cycle with a lower revenue number but to relation, those numbers are very high.

We see a contract for $3 million or $5 million, $400,000 but we see also a lot of small contract orders for outside distributing contract that can range from say $20,000 to $400,000 so we still believe that the large contract of over $20 million still order for us of the pipeline as we hope to see a realization and reward on such contracts in the future.

And we have that -- we believe that our numbers or revenues going to be much, much higher number than anticipated guidance we put out there. But the important thing is that all our guidance and for this year and what is the next year right now are without taking into a current any large number.

So there is only an upside -- not upside out there to our --.

So you think that there is actually a realistic shot that between now and yearend we could be awarded one of these larger contracts or is this kind of a 2018- 2019 kind of even if they happen, that's the timeline. .

Okay. First of all, I think that one of those large contracts can't be awarded from today until the end of the year. And as we described the way those last contracts are behaving, their SGS, they can be any months from today and but we believe that there is very high probability that one of the large one will be in 2018. .

Okay. Thanks so much. That's all I had. And I just want to thank for the comments, everybody appreciate the timely reporting. It's a great fresh, breath of fresh air. Thank you so much. .

Thank you. I'll now turn the call back to management for closing remarks. .

Okay, thank you. And I'll back again to thank you for joining our conference call today. And I hope to see you in about three months in our third quarter conference call. Thank you again. .

Thank you. This concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation..