Another Year, Another CFO: Time To Short SuperCom Ahead Of Q3 Earnings
Nov. 18, 2015 5:02 PM ET | 15 comments | About: SuperCom, Ltd. (SPCB)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
The company today announced the third abrupt CFO departure in as many years.
The elevated turnover at this key management position is highly concerning.
After already missing expectations for the fiscal year 2014 and Q2/2015, investors should prepare for another dismal earnings report and substantially lowered full year guidance.
The company's major contract wins announced in 2014 have so far failed to make material contributions to Supercom's top and bottom line.
A short position should yield material profits going into the Q3 earnings release.
SuperCom (NASDAQ:SPCB) is an Israeli company and "provides traditional and digital identity solutions to governments, and private and public organizations worldwide".
Until 2014 SuperCom was a tiny company with annual revenues below $10 mln but then the company managed to buy back their former SMART ID business division from oti (NASDAQ:OTIV) thereby more than tripling their FY2014 revenues to around $30 mln. The company has since guided for 2015 revenue growth of 45% with the current analyst consensus standing at $41.3 mln.
SuperCom announced two major contract wins in 2014 for combined future revenues of $47 mln causing the company's shares to go into a major tailspin for some time but since then failed to book anything close to that magnitude. Moreover those supposed contract wins have seemingly failed to make any material contribution to the company's top and bottom line so far.
Actually the first half of the current fiscal year was nothing to write home about and revenues were a meager $15.5 mln. SuperCom reported Q2 revenues substantially below expectations but the company's CEO Arie Trabelsi as always offered untampered optimism about the business on the conference call subsequent to the company's earnings release. Given Mr. Trabelsi's stated goal of SuperCom reaching annual revenues of $250 mln as early as 2018 there's seemingly some work to be done with this regard.
With Q3 results to be released on November, 30 the company today announced the third abrupt CFO departure within the last two years. Both previous CFOs served only roughly 14 months before departing.
The elevated turnover in this key management position is highly concerning given that the company already has a troubling history of misleading statements and confusing press releases as fellow contributor Jay Yoon rightfully pointed out at the beginning of the year.
Since the company has failed to announce major new contracts for some time now and revenues from existing contracts seemingly do not materialize as projected the shares have lost more than 40% from their 52-week-highs but are still trading more than 100% higher than before the company bought back the Smart ID business from OTIV.
Fortunately SuperCom successfully accessed the capital markets during Q2/2015, bringing its cash position to above $30 mln so at least the company won't run into liquidity issues anytime soon.
I have been a long term bear on the company mainly based on the CEO's frequent unsound projections and false statements and to some part based on the issue that SuperCom sold that Smart ID business to OTIV in 2006 for $20 mln just to buy it back for half of that amount at the end of 2013 and almost immediately the very same unit that has been a drag to the businesses of both SPCB and OTIV over many years wins some major orders. Adding the ongoing turnover at the CFO position I clearly have my doubts about the validity of those orders or even large parts of the business as a whole. Those orders might very well exist at least to some extent but as of now we still don't know about the revenue and margin contribution at all. In fact they might be much smaller than Mr. Trabelsie made them appear or the revenue recognition might take much longer than initially projected.
Anyway, the company WILL have to show some major progress with regard to the second half of 2015. Quarterly revenues will have to almost double going forward to meet the company's projections for 2015. They will also have to announce another major contract win pretty soon as investors are clearly losing their faith and patience. With no new major projects in backlog analyst estimates for 2016 of close to $57 mln in revenues representing another close to 40% increase compared to current FY15 estimates might end up as bad joke at some point. It should be noted that analysts already took down their initial FY15 and FY16 estimates following the poor Q2 report.
Given the lack of new contract announcements during the quarter and another abrupt change at the CFO position I would expect the company to materially miss the already lowered Q3 analysts' consensus of $13.4 mln and to guide down FY15 and FY16 expectations substantially. At current levels a short sale should yield decent returns over the next two weeks.
After all I still wouldn't be too surprised to see this company being exposed as a major fraud one day but for now investors should focus on the company's all important quarterly results and business announcements going forward.
Bottom line:
The company has already missed investor expectations for the last quarter and the last fiscal year. The lack of new contract announcements during the quarter and another change at the CFO position shortly before reporting Q3 results doesn't bode well for the upcoming numbers. Investors should take a short position in the shares going into the earnings release as I would expect another set of dismal numbers and guidance.
AI
