SuperCom Ltd. Q2 FY2025 earnings call

• Invested over $45 million in the technology platform, with proprietary solutions outperforming in competitive tenders, achieving a 65% win rate in Europe.
• Focused on criminal justice and offender electronic monitoring solutions, with 3 pillars: innovative technology, global presence expansion, and outstanding service.
• Launched advanced solutions like PureProtect/PureShield and PureOne. Secured over 70 multiyear government projects since 2018, added over 30 new contracts in North America in the past year, and formed 9 strategic partnerships with U.S. regional service providers.
• Displaced long-standing incumbents in Sweden and Israel. Helped establish national electronic monitoring programs in Romania, Croatia, etc.
• Focused on the U.S. market with a cloud-based system enabling efficient nationwide deployments, secured over 30 new electronic monitoring contracts, entered 11 new states, and formed 9 strategic partnerships.
• The PureSecurity suite is effective in monitoring offenders, reducing recidivism, and lowering costs.

In the second quarter of 2025, revenue was $7.14 million compared to $7.5 million in the same quarter of 2024. Gross profit increased by 12.7% to $4.2 million, with gross margin expanding to 59.1% from 49.6% year-over-year. Operating income nearly tripled to $1.1 million. For the first half of 2025, GAAP net income reached $5.3 million, marking an approximate 80% increase from the prior year period. EBITDA increased by 56% to $2.5 million, representing the 12th consecutive quarter of positive EBITDA. Cash and cash equivalents totaled $15 million, working capital improved to $40.8 million, and the book value of equity rose to $37.3 million.

• The U.S. market is projected to be 6 times the size of the European market, with high-margin potential.
• Will continue to be active in the European market with various projects.
• Evaluate strategic acquisition opportunities in the U.S. market to expand the footprint, unleash synergies.

• Macro-economic uncertainties.
• Ongoing global challenges, including in Israel.
• Volatility in project mix affecting margins in individual quarters.

Q: Congratulations on the strong results in the quarter and half. Can we start with where the opportunity is for expansion with the contract in Israel? Is there just kind of a layering in of your devices on the existing system? Or do you need sort of expansion in the use of monitoring in the country to kind of expand within that contract?

A: It's a great question. On our last quarterly results, we announced, I think, roughly 1,200 units that were delivered and now we surpassed 1,500. It's already growing in the amount of units. And before us, there's another company, another Israeli company, and they have been providing the solution for over 20 years. So we're new, and we've brought the technological advances that we've deployed all around the world in many different projects, and now we brought them here to the program in Israel. And the project is such that encompasses all EM programs in Israel. So the company, in general, we have GPS tracking, which allows someone to also leave their house, go to work and other things while they're being tracked. We have a house arrest, there's alcohol monitoring, there's domestic violence, which we've been taking a strong lead globally on. And in Israel, whatever programs they decide to deploy, it would utilize our technology. So there's growth within existing programs that they had for a long time, which is mainly house arrest. And they are delving in and trying and looking to add additional ones, and we'll be there to support them in that expansion, as we've done with many countries around the world.

Q: And as you think about the opportunities you have in Europe versus kind of the more fragmented U.S. market that I know you're investing in. Looking out over the next 4 to 6 quarters, is the balance more in the U.S.? Or is there -- are there national programs that you're competing for in Europe that could also land? Just curious kind of where we should think about growth coming from in the next few quarters?

A: It's a great question. So in Europe, we started several years ago in Europe. And we started with Latvia and Lithuania, which are small projects, and we grew into more and more projects. And lately, we had Latvia police, which is additional projects in Latvia; and Sweden, we had the second and third project. And so we are so active in Europe. And we've just been bidding over the recent months, and we continue to bid on projects in Europe. Some are smaller scale add-ons to existing deployments, some are brand-new projects and some are very large projects, larger also than the ones that we've won till date. So there's a variety of opportunities in Europe, and we still plan to be active in the European market. Just that if you look at the U.S. market, we've also put a lot of focus on to it because it's expected to reach 6x the size of Europe. The economics are higher, you don't need a local partner to help you with language and deployment, everything is done centralized with the cloud, and it's all in English. And with our 24/7 monitoring and inventory management services and other support services, we're able to deploy units all across the U.S. with higher margins and the U.S. market is fragmented, as you mentioned, which is true. So it takes a little bit more work on the sales process. More meetings, more demos, but it allows you also to grow faster. You don't have to wait for an RFP that comes out in 2, 3 years for the entire national project that we see in Europe. You can pick off counties one by one and small resellers that you work with? And as you've seen in the last year alone, we've signed over 30 contracts just in the U.S. for electronic monitoring. So the expansion potential is great there along with high-margin potential, higher than what we saw in Europe and higher than what we've seen yet today in the company.

Q: Your strong earnings were really clearly a function of margin expansion, more than revenue growth. Can you give us a little bit of color regarding what the opportunities are for even higher margin expansion? You mentioned that briefly in your opening remarks. But also is the very strong margin expansion, a function of geographic mix? Or is it a function of first-time sales versus follow-on sales? And how do you see that playing out in the next couple of quarters in terms of your revenue growth as well?

A: Okay. So multifaceted question. Let me first talk about generally what we've been doing in Europe, we've been deploying projects in different regions and everyone teaming up with local partners. As you do this -- after we do this more and more for many years, we start to consolidate the various services. And that, of course, helps us with margins. We're always looking in our operations to improve profitability and margins with things that we do over and over and over again, like deploying more projects in Europe. In the U.S. market from the nature of it because it's in English and it's on the cloud and we've got one 24/7 Center, it already has inherent optimization of margins that is certainly going to be helpful. And so we are optimizing where we can. But at the same time, and this is what I noted also in the script in the opening remarks, we're deploying many projects around the world at the same time. We talked about 30 contracts in the U.S. We talked about some existing customers in Europe and new add-ons. They all have their own time line and they are at different stages. So some early on have lower margins and then reach higher margins. Some early on have higher margins and reach stable margins, which are potentially lower. It depends on the structure of the program and whether it's a lease or a purchase of the monitoring and also what they're looking to do and the partnership. So while I would love to give a general answer to exactly how it's happened, how it's going, it's actually we're reporting the mix, but behind the curtain, there's many different things that are moving around every quarter. And so it's hard to predict exactly how that's going to fall into place. We are seeing general improvements across the board and operating leverage and economies of scale, and we'll continue to see that. And very long term, if you want to start with that, long term, we think that as more and more of the revenues come from the U.S. and more and more units deployed in existing contracts and more operational efficiencies, economies of scale and operating leverage, margins can expand even more than where they are today, and that's long term over the years.

Q: Would you say that your visibility on margin expansion is a little better than your visibility on revenue growth? Or is it the other way around? Or any comments there?

A: That's a great question. With the projects on some of the previous questions, we bid on many projects also in Europe besides the ones in the U.S. and even the ones that we started in the U.S. They each are growing at different rates. We talked about Israel, that there's growth of the project, there's potential for more. It's still hard to know where the growth will come from and at what pace? And similarly for margins, the margins, it's a different challenge. We know that the margins in general, how to improve them. But per project, we can't know which stage of the project is going to happen and in which quarter. So it's on the back behind the curtain, it's a mix of a lot of different things happening together. It's still hard for us to predict. Over time, certainly, we expect to have more customers, more diversity in customers and we'll have much better visibility on also revenues and margins. But that, of course, is together with us expanding into more and more locations and having a bigger, more diversified customer base across the world.