SuperCom Finally Reports Its Fourth Quarter And Full Year 2015 Results - Can It Get Any Worse ?
Apr. 12, 2016 9:19 AM ET| About: SuperCom, Ltd. (SPCB), Includes: OTIV
Henrik Alex Henrik Alex?Follow(757 followers)
Summary
Q4 revenues and earnings again came in well below guidance and analyst expectations.
Management refrained from giving guidance for FY2016.
Cash balance down by more than 25% quarter over quarter and is going to decline further.
Investors should continue to avoid the shares.
As predicted SuperCom (NASDAQ:SPCB) finally closed out a highly disappointing fiscal year 2015 with an equally disappointing last quarter, with revenues and earnings per share again falling well short of the company's guidance as well as analysts' and investor expectations.
This latest miss is particularly embarrassing given the company's then acting CFO's statements on the Q3 conference call after being hard pressed by analysts about his confidence in SuperCom achieving its (already substantially lowered) Q4 and full year guidance:
That's okay that we are a month before the end of the quarter and the numbers that we just mentioned we believe that we have all the full confidence to recognize in full and everything else is just going to be an upside too.
After an uninterrupted series of painfully wrong predictions over the last two years, management at least this time refrained from giving any guidance for FY2016. In fact they even declined to comment on the already closed Q1, so investors seemingly have to prepare for just another ugly quarter.
Looking at today's conference call transcript, the only positive thing that came to my mind was the obvious silencing of the company's CEO, Ari Trabelsie. Clearly this was a good move not only because of his strong accent, but also because of his frequent unsound or even outright false statements on previous occasions that recently found their inglorious culmination on the Q3 conference call when he had to be called off by the then acting CFO in order to prevent him from giving out just another set of wrong numbers.
Unfortunately, despite the prevailing abstinence of the CEO, the Q4 conference call transcript again is somewhat confusing due to a large number of obvious transcription mistakes.
Anyway, there are still plenty of red flags with regards to the company's business in the transcript so let's get into the details here:
Weak commodity prices have allegedly impacted a number of regions where the company is actively bidding on or even awaiting to deploy already awarded contracts.
Competitors are supposedly challenging contracts that were already more or less awarded to the company causing distractions to the company's efforts to secure new business.
As predicted the acquisition of LCA will (at least initially) dilute the company's margins but management expects them to improve "through a process similar to our management team has undertaken with SuperCom and OTI in the past years (...), including synergies with SuperCom and the opportunity to utilize SuperCom's proprietary electronic monitoring solution in place of those coming from third party vendors." Given the ongoing decrease in the company's gross margins since the acquisition of the former OTI (NASDAQ:OTIV) Smart-ID division in late 2013, investors most likely won't find much comfort in this statement.
The recent acquisition of Safend will require SuperCom to provide up to $1.5 mln initial working capital support and most likely further cash injections might be required over time given that just 50% of Safend's $5 mln annual revenues averaged over the last few years are considered to be somewhat recurrent in nature while the other half is now facing a potential major sales distraction due to the required channel transition.
Gross margins on a full year basis were down to 62% compared to 77% in 2014 with the trend essentially worsening throughout the year. Going forward the company expects its gross margins to be between 60-70%, which I would again view as quite a stretch given that the ultra-low margin LCA acquisition alone might make up for up to 25% of the company's FY2016 revenues.
The company's cash position was down by more than 25% quarter over quarter (from $30 mln to $22.2 mln) mainly due to the company's recent share buyback initiatives and some additional working capital investments. Investors should expect the company's cash position to decline further going forward given the required payments in conjunction with the acquisitions of LCA and Safend as well as the company's ongoing share buyback activities during Q1.
After being pressed by analysts on the large decrease in the company's cash position, management on the call admitted to the spending of $1.5 mln on broker commissions to buy back just $5 mln in common stock calculating to an almost unbelievable 30% commission fee. I would strongly advice the company's auditors to take a closer look at this ominous buyback.
Despite several questions on the call, management refused to provide any comment on the already finished Q1/2016 so investors should prepare themselves for just another ugly quarter. Depending on the exact closure date of the LCA acquisition the current Q1 analyst consensus of almost $10 mln in revenues might again prove too high, but from a percentage perspective a potential revenue miss will clearly be the lesser disappointment compared to the imminent large earnings per share miss. With Q1 analysts' consensus currently at a whopping $0.15 and some expected contributions from the low margin LCA and the loss-making Safend acquisition, I would actually expect Q1 to come in closer to break-even.
The company's trade receivables continued to move up during Q4, a trend witnessed for a couple of quarters now despite the company's ongoing failure to generate revenue growth. The company also recorded bad debt expense of $0.6 mln during the quarter which unfortunately wasn't discussed in detail. Management downplayed the issue on the call by pointing to successful collections during Q1 and the general expectation for the receivables number to come down over the course of the year. Management also stated, that they don't see a higher risk profile in their receivables currently (sounds somewhat strange given the material bad debt expense incurred at year end).
After being pressured by fellow contributor Marcel Herbst management admitted to not only longer purchase decision cycles currently witnessed particularly in developing countries but also to some delays recently experienced in the approval of milestone payments. Management is trying to mitigate the issue by securing additional business in more stable countries like the US and Europe.
During the Q3 conference call management tried to explain the large miss with an alleged $10 mln contract that did not close as anticipated at that time. Obviously this ominous "contract" still hasn't been signed yet - if it ever existed in any form at all.
On the Q3 call, the company guided for $20 mln in recurring revenues from their "steady state" business in 2016, a whopping 33% increase from the $15 mln number recorded for 2015. Given that the growth rate over 2014 was at just 25%, this projection already looked quite ambitious at that time. Not surprisingly management took a step back on today's call and now just expects the number to "grow" over 2015.
The company refused to discuss the reason for the earnings delay experienced last week other than stating that there was no financial impact on the 2015 finances. Management pointed to an upcoming separate press release on the issue, so this remains up to anyone's guess at this time. If recent history serves as a lesson, investors should not expect any positive developments with this regard.
Bottom line:
SuperCom continues to disappoint on all fronts and rightfully the shares have moved to new 52-week-lows in the wake of today's results and conference call. I have been a vocal critic on the many issues surrounding the company and its management for quite some time now and have been largely proven right so far.
Investors need to prepare for another year with little or perhaps even negative organic growth as already partially reflected in the current 2016 analyst consensus of just $36.4 mln in annual revenues despite the likely addition of more than $10 mln in acquired revenues from LCA and Safend.
It will take a deeper look into the company's upcoming 20-F filing to get a better understanding of SuperCom's 2015 performance in order to derive potential implications for the company's business going forward. In case of material new information being disclosed, I will provide a follow-up.
The company's business has been stagnant at best since the acquisition of the Smart-ID division from OTI more than two years ago with gross margins on an ongoing decline and even the company's cash position deteriorating as of late.
Investors should continue to avoid the shares as SuperCom's business model continues to look ill-conceived with too many moving parts involved and a management seemingly incapable of righting the ship. As long as most of the company's relevant business metrics continue to point in the wrong direction, there's very little to gain here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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