Arie Trabelsi - President and CEO Ordan Trabelsi - President, SuperCom Americas.

James Medvedeff - Cowen & Company Tony Pollock - Aegis Capital Greg Reiter - Investa Capital William Gibson - Roth Capital Partners.

Good day, good morning. Welcome to SuperCom's Fourth Quarter and Full Year 2017 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. Following their remarks, we will open up the call 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 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, or 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. At this time, I would like to turn the call over to Mr. Ordan Trabelsi. Please go ahead..

e-Gov, IoT and Cyber Security. They offer significant synergies on the sales and cost sides, but they also have distinct advantage of being able to share technology capabilities and offer integrated solutions such as secure Wi-Fi and secure mobile payments for government identification.

And finally, our fourth key initiative which I touched on earlier is create additional operational efficiencies. We are continuing to see significant traction as we continue integrating the real -- and realizing synergies from our acquisitions.

Most of these integrations operationally have reached a close to completion stage with only potential upside in additional synergies to realize and fixed cost to leverage.

While this quarter continues and contained a few irregularities, over the long-term, we're seeing continued gross margin increases across our businesses not to mention a healthy reduction in operating expenses as a percentage of sales. I will now turn to our financial results for the fourth quarter and 12 months ended December 31, 2017.

For the fourth quarter of 2017, our revenue grew organically by 93% from Q4 last year to $7.8 million. For 2017, our revenue increased 66% to a record $33.3 million compared to the same period of 2016.

For the fourth quarter of 2017, our non-GAAP which include a realization of $1.4 million in deferred revenue grew organically by 127% from Q4 of 2016 to $9.2 million. For 2017, our non-GAAP revenue increased 72% to a record of $34.6 million compared to the same period in 2016.

On a non-GAAP basis, for the fourth quarter of 2017, our gross margin improved to 31.9% compared to a negative 23.1% in Q4 of ‘16. And for the full year, our non-GAAP gross margin improved to 45.5% from 16.9% in 2016.

Turning to our expenses, our total operating expenses for the fourth quarter of 2017 were $6.1 million, which was down as a percentage of total revenue from Q4 of 2016. For 2017, our total operating expenses were $19.4 million or 58% of total revenue which was also down as a percentage of total revenue compared to 2016.

The improvement in our total operating expenses as a percentage of revenue for both periods reflect the continued cost reductions and improved efficiencies across our business, as well as our focus on tightly managing expenses. Looking at our core expenses more closely, R&D was $1.9 million for the fourth quarter of 2017 or 24% of total revenue.

This compares to $2.6 million or 65% of total revenue in Q4 of the prior year. For the full year, R&D was $7.2 million or 22% of total revenue compared to $6.7 million or 34% of total revenue in 2016.

It's important to note that R&D is critical for us but to be sure, we are very strategic in R&D investments focusing on the highest potential ROI areas for our business. Sales and marketing expense for Q4 2017 was $2.1 million or 27% of total revenue. This compares to $3 million or 73% of total revenue in Q4 of the prior year.

For the full year, sales and marketing expense was $8.1 million or 24% of total revenue compared to $10 million or 50% of total revenue for the prior year. G&A for the fourth quarter of 2017 was $1.7 million or 22% of total revenue. This compares to $1.9 million or 47% of total revenue in Q4 of the prior year.

And finally, G&A for the full year was $6.1 million or 18% of total revenue compared to $7.3 or 36% of total revenue in the prior year. Now turning to our profitability measures. For the fourth quarter of 2017, EBITDA loss totaled $1.2 million, which compares to an EBITDA loss of $3.7 million in Q4 of the prior year.

For the full year, EBITDA increased to a positive $188,000 compared to an EBITDA loss of $6.5 million in the prior year. As I stated earlier, we have operations in several countries in connection with the sale of our products. Substantial portion of our sales expenditures are denominated in dollars.

We have mitigated and expect to continue to mitigate a portion of our foreign currency exposure to salaries, marketing and support operations in which all costs are local currency based. As a result, our results from operations and cash flows can be affected by fluctuations in foreign currency exchange rates, primarily the NIS or New Israeli Shekel.

In the fourth quarter of 2017, we incurred a foreign currency loss of approximately $1.7 million. In the future, we may choose to carry out certain transactions that would be designed to hedge our exposure in New Israeli Shekels against the US dollars.

On a non-GAAP basis for the quarter, our net loss improved to $2.1 million or negative $0.14 per share from non-GAAP net loss of $4.1 million or negative $0.28 per share in the same year ago quarter.

And for the full year, our non-GAAP net loss totaled negative $2.2 million or negative $0.14 per share, an improvement from non-GAAP net loss of $7.8 million or negative $0.52 per share in the prior year period. By year end, we approximately had $2.1 million in cash and restricted cash.

And with that, I'll now turn the call over to Arie for some closing remarks before opening the call for Q&A. .

Thank you, Ordan. As we've just heard 2017 was a good year for SuperCom highlighted by superior financial performance and continued growth within our three major divisions.

Moving forward, we remain focused on growing our margin even greater level by winning new business and positioning our various ongoing deployments into long-term steady-state recurring revenue generator. Looking to the rest of 2018, we are looking to improve both our top-line results for this year, while also returning to EBITDA profitability.

We are really excited and optimistic about where our business is today. In fact, SuperCom has never been better positioned operationally and financially than we are today. We look forward to providing more update on our expectation for the years on upcoming calls. And with that, we are ready to open the call for your questions.

Operator, please provide appropriate instructions. .

Thank you, sir. [Operator Instructions]. And we will take our first question from James Medvedeff with Cowen & Company. .

Hi. Thanks for taking my questions, and congratulations on a strong year. And some real progress especially in the IoT business. A couple of housekeeping questions just to start off.

What was the weighted average shares outstanding in the fourth quarter and the year?.

About 14.95. .

Is that for the quarter or for the year?.

For the year it's about 15 million and for the quarter about the same. We have almost no change during the year except for 20,000 shares that auction was materialized. But except for that, was at the same level for the whole year. .

Okay, thanks.

And also what was capital spending during the quarter?.

About CapEx?.

Yes, please?.

What is the capital spending? Over less than $1.5 million was the total CapEx for the year. .

For the year. Okay, thanks. So congratulations on the expense controls also by the way.

That’s -- how should we think about that going forward? Will you reduce them pretty nicely? And the question is, are you now sort of at a steady-state level of spending in those areas or should we expect them to grow a little bit with revenues through year or how should we think about that?.

Okay, yes. We are already continuing the first quarter and we believe that in the second quarter as well we will -- our goal is to reach our optimal OpEx. We’d like to have an average of $4 million like our OpEx per quarter.

And our goal is to reach about $1.2 million off the quarter for R&D, $1.5 million to $1.6 million for sales and marketing and G&A to keep to the level of $1.2 million. And we believe that once we reach these levels, we'll be at what we call an optimal OpEx.

The sales and marketing may increase based on our commission that we provide our sales people as our sales are doing. .

Okay, sorry?.

He is referring to the non-GAAP numbers, as you know which is close to 4.6 -- $4.5 million 2017 of amortization, depreciation and stock-based compensation which are adjustments from GAAP to non-GAAP on operating expenses. .

Okay, I just want to be -- I want to be clear I understood.

These are goals, and when will be achieved?.

We believe that this -- the second quarter we will be very close to those levels. Second quarter of this year, we're continually striving towards them. .

Okay, I appreciate that. Thank you. .

Thank you. We will take our next question from Tony Pollock from Aegis Capital. .

Good morning. I did not hear the explanations that were given for those questions. They were very garbled. So I was wondering if you could repeat them with a little more clarity. .

Which one?.

All of them, they were all garbled and I couldn't understand what they were saying..

Okay, I’m not sure we'll remember all the questions but there was a question regarding the operating expenses and Arie referred level. I'd shared some numbers of our goal non-GAAP operating expenses by expense line, R&D, sales and marketing and G&A.

And the sales and marketing might fluctuate based on revenue growth, but our goal for G&A and R&D is of that the numbers that he shared. The total at current levels, the total close to it..

So are they what they were for the 12 months as you expect that going forward because it appeared you haven't told me the numbers..

No, we expect that our OpEx for the year 2018 is going to be in the range of about $4 million non-GAAP OpEx. .

No, I understand the OpEx but what about the R&D and the G&A, and the selling and marketing?.

Per quarter non-GAAP our goal is to reach close to $4 million with the current revenue levels. As revenues will increase, sales and marketing, and commissions will probably increase accordingly. We also shared the CapEx would -- CapEx of 2017 I was asked is a little less than $1.5 million. And those details would be on the 20-F..

Okay. Research and development last year was 7.2 million.

Can you give us an idea of the return on investment expected on that research and development, what it went for and whether that number will continue?.

Without the specific ROI measured on R&D but we could tell you that we have been investing across our three business segments, some of what you can see already in our IoT investments or the wins that we've been having lately across Europe and the US and our ID business as well.

And of course in our cyber we're able to maintain our current customers as well as develop new products to help us win new business..

Okay.

In terms of -- do you have an idea of what the research and development spend is on new products versus your existing business?.

We haven't broken that number out. It’s -- the teams work together on existing business upgrades and also new products. .

Okay.

I still am a little confused on what you expect the R&D to be going forward?.

It should be in the range of $4.8 million to $5 million per year..

So that will be substantially less than last year..

Yes, as we -- our disposition finalizes most of our product line from R&D point of view, the complete integration between businesses we acquired into our product line. It's very predictable that our R&D expenses should be reduced to a level that will allow us to continue to push it forward.

A lot of R&D was invested in the IoT product line, which we believe it’s in a very material position right now and we do not expect or need to invest more into R&D, as we believe our products are among the most advanced products in the market.

There will be some adjustments and there will be some new features built into that to believe that we should not invest as much as we invested in the last four years in the R&D. It's time to get other way..

Alright. I saw a prediction of 35 million in revenues.

Was that for 2018? And can you tell us what quarterly level you need to breakeven in terms of sales, assuming there is no …?.

We have not provided guidance for '18 but we believe that we will continue to see a growth mainly because the key businesses of the three segments that we have are all growing very nicely, the IoT is running very fast and getting more and more contracts.

Now we have to remember that each contract in the IoT and area which will then provide us with a record against the buildup. So we will see in the next quarters and even for the next [60] months an increased revenue from those contracts that are being built.

As Ordan mentioned earlier, our recorded revenue is increasing from year-to-year and this is our basis for revenue with a high gross margin and we believe we will continue to see this kind of growth. .

Alright.

Could you give us an idea of what your breakeven point is accounting currencies and things like that?.

So that will depend of course on where the revenues reach with the new projects and -- because the gross margins are impacted by different project levels, projects can vary.

But generally speaking from current gross margin rates, if you look at non-GAAP gross margins of 50% and $35 million of revenues which is close you are looking at around $17 million to $18 million in gross profit, if you reach a non-GAAP operating expense level between 4 million and 5 million which we are driving towards, we meet that breakeven there..

Okay. So we’re assuming that approximately $8.5 million quarterly run rate to your breakeven. .

Again it depends on the breakdown of the gross margins for the project and also we are still improving our OpEx as we move along but …..

I think that it’s important, it's very important. Ordan mentioned that we went last year to a large construction -- the construction of our business into two segments, consolidating, converging all the business we acquired to very, very strong segments right now which -- by -- that each one of them is growing very fast.

We are very close to getting into the optimal point in our expenses and we do believe that the coming year will be a turning point from GAAP to non-GAAP profit after we reach this point. So we believe that you will see that in the near quarter a major change in the profit levels. .

Okay.

When can we expect the March 31st numbers?.

We cannot say exactly as we are just closing everything for the -- from the earliest but we hope that between Q2 and four weeks from today and even less than that we will provide those numbers. We have most of the information on hand but still we need to complete the number here and drive those near structural EBITDA.

So I believe in between three to four weeks that is going to be out and we believe and hope that later on all the four late quarter will be reported within the [35] days after being reported. .

And we will take our next question from Greg Reiter with Investa Capital..

Just tell me or reconcile, you talked about Ordan more visibility with a steady-state revenue ramping yet you're not providing guidance.

We are already through the first quarter, I mean help me understand why you are hesitant to do that?.

So our steady-state part of the business as we said for 2017 was 24 million and we are expecting that number to continue growing but the other portion of our business which in this year was over $8 million of projects-based revenue, it's hard for us to predict at this point.

There’s many projects that we're deploying in parallel, I think close to 13 or 14 just in e-Gov and IoT and there’s a big pipeline of other opportunities which are -- some of which are close to close. And it makes hard for us predict things beyond the steady-state revenue at this point. .

Alright.

And is it fair to assume given what you just said that project revenue should be up in fiscal '18 versus '17?.

We do not know that as of yet. We’ll have to see that ….

Despite all the projects ….

Sorry?.

Despite all the projects that you just cited that you have underway?.

Yes. And it depends on how much of the projects progressed. It’s -- we're talking about government timelines in different locations around the world. And there is some less visibility around that.

But we do expect as projects continue to have additional growth revenues -- sorry project revenues and we also have project revenues from projects that target and impacted 2017 and those will also contribute to 2018 by growth additions. .

I think it's important maybe to -- talking about the way this recurring revenue being built-up. We have contracts that -- and we have completed in the e-Government and they are generating positive recurring revenue. We have an excellent pipeline of contracts in the IoT that are being built right now.

And we will believe it will provide us with very nice stream in growing revenue. And we have our Cyber Security revenue which are -- each one of them has a very nice and high gross margin.

I think that’s important thing if you look at what happened the year 2017, we optimized our cost, we've built a very strong structure to implement our business plan, sell our project and be very, very efficient. And growing our base of steady-state recurring revenue will provide us with a very high margin revenue.

And coupled with a very low operating expenses going forward, we will see a major change also in the portfolio built-in margin us going forward. We believe that we will see very similar number that we had in the year 2015, set up for margin contribute. .

Okay, appreciate the added color, Arie. But I guess just again not to diminish what you did during the current year, but Q4 I’ll say it was noisy to be quite. What the deferred revenue, this is big crap up all of a sudden and hasn't really happened to GAAP versus non-GAAP up to this point.

And what the cash flow from operations in Q4? It looks quite negative. And I see there is now some now related party loan on the balance sheet.

Can you detail that as well?.

Okay. So you will see our order of cash flow for the year and I think that it's much, much lower than previous years. It's very close to getting to have the breakeven point that we are looking for.

Now from -- sorry, Ordan?.

I have that number available on the operating cash flow for the year. It was a little less than negative $2 million, significantly better than 2016, which is around $10 million or $11 million negative operating cash flow. So that's improved significantly in 2017.

I’m not sure?.

Now I’m -- but I’m not willing to talk about the cash that you just mentioned. We are winning projects and as you can see every project in the IoT and other requires our investment in couple of small point of view. We are building product for customers. It should have a nice return after eight to nine months after the delivery.

So right now every win that we have, we build upon it, we lease it to our customers who will see a major need for capital of cash as we had in the next -- in the last six months.

But we do see and believe that that all those investments in few of the products that we had in the last year and that we are letting it to our customers will provide us with a very nice return and very strong cash flow in the following quarter.

And again our business right now is turning cash into products that later are being leased to governments around the world with a very nice return..

Okay, I mean I don't doubt that but I mean the elephant in the room is your balance sheet, right? And this fourth quarter is a pretty negative in terms of cash from operations by what I see has happened to the balance sheet. This related party and liability of 2.1 million.

Can you detail that, is that a loan from you, and what's the terms of that?.

Yes, first of all -- okay, first of all, I’m not saying we can speak on the exact number right now, the -- that is on the first quarter. But as I said we are investing into products that are being leased to our customers, so we need cash for that. There are three options of doing that.

One is to raise capital, and we are not going to do any capital raise, especially not of this value of the shares. I am not even thinking about that. The other option is raising cash debt in the market.

And if we see that we just need some couple of million dollars for bridge loan for building these products, yes, we, the CEO and Chairman of the company provided the frontline for the company in about $2 million, $2.5 million to bridge a bridge loan with no interest. So we have a strong belief in what the company is doing.

So we provided this kind of digital company and we do believe that the company will be able with the return on the product we already built to turn into a very positive cash flow and there’s going to be no need for raise capital or no need to raise debt..

Alright, that is very helpful. No interest on the loan, zero interest rate..

No interest, no interest..

Well, we're obviously on the same page there. It's excellent. And in terms of cash flow from operations then, what should we think about for the next couple of quarters? I'd like to see the balance sheet improve next time we talk in a month or so..

Okay, I believe that you will see that improve well before the first quarter but we do anticipate a strong cash flow for the year 2018 based on what we’ve built already and based on project that's already in deployment..

Okay. So cash flow is a number one thing at this point. So thank you for answering the questions and appreciate the no interest loan for all of us shareholders. Thank you..

Thank you..

We'll take a question from William Gibson with Roth Capital Partners..

Thank you.

What accounts for the difference between reported revenue and then you had a non-GAAP number?.

Could you repeat that, could you repeat the question? Sorry..

Yes.

In your release you have your reported revenue and then you had a larger non-GAAP number and I was just curious what accounts for the difference?.

Okay. There is about $1.4 million worth of income that is in on the GAAP is being identified as other income. We believe that on the netted basis, it should be regular revenue. It’s a payment for receivables. And the GAAP calls for different treatment for that and we believe that we should be into non-GAAP basis it should be on the revenue side.

It’s payment for invoices..

Got it, thank you. .

And ladies and gentlemen, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Arie Trabelsi for his closing remarks. .

Okay, thank you for joining us today on this call. We especially want to thank our employees, partners and investors for their continued support and patience. We appreciate your interest in SuperCom and we look forward updating you on our next call.

Operator?.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for joining us today for SuperCom's fourth quarter and full year 2017 earnings conference call. You may now disconnect..