Wednesday, November 5, 2014

SuperCom ( Nasdaq - SPCB ) -- In Control

SuperCom (SPCB $12.00) is a niche provider of digital identity systems.  The company focuses on emerging markets.  Africa is its leading geography.  Other regions include South America, Asia, and the Middle East.  SuperCom sells its systems primarily to government customers.  Applications include drivers licenses, vehicle permits, passports, visas, national multi-ID documents, border control, and a range of narrow programs.  SuperCom also provides traditional paper documents as required.  Digital systems contain biometric data, holograms, ultraviolet patterns, and computer memory that are tied into national databases.  Forgeries are more expensive and complicated to make than for paper documents.  Digital systems also provide improved data reporting.  Demand is rising in Third World countries due to basic modernization trends.  Greater emphasis on security and terrorist threats are reinforcing growth.  At this point Ebola control hasn't become a factor.  If the disease continues to proliferate tracking systems might be implemented for that purpose, as well.

The company acquired a direct competitor last December.  On Track Innovations ("OTIV") decided to sell the unit and deploy those funds in its wireless payment technology.  That line required capital to realize its potential.  SuperCom paid $10 million in cash plus a contingent earn-out for the division, which sells digital identity systems primarily to Third World customers.  The transaction reduced direct competition, expanded technology resources, and beefed up sales and marketing.  Since combining forces SuperCom has signed $55 million of new business so far in 2014.  The company also has been able to bid on far more projects.  The industry remains generally competitive.  Most participants emphasize the developed world, or huge emerging countries like India and Brazil.  Margins tend to be high throughout the industry.  Initial deployments typically generate gross margins of 55%-60%.  Recurring revenue usually equals 20%-30% of the initial build-out cost, and yields gross margins of 70%-75%.  Overhead consists mainly of product development and sales commisssions.

Two additional technologies might amplify growth.  SuperCom is rolling out a digital tracking line aimed at the corrections and health care industries.  The units include superior batteries and longer range than existing bracelets.  Applications include prisoners on release, medical patients at risk of wandering, and health care equipment that moves frequently.  An animal tracking system also is in development.

Mobile payment technology offers additional diversification.  SuperCom's "Pure Money" application works on any kind of cell phone, not just the most advanced versions like the ones required by Apple Pay.  The target market will be unbanked consumers, mainly in Third World countries.  Fees will be earned from participating merchants and governments, in addition to transaction charges.  The technology allows retailers to uses their own phone or tablet computer as a point of sale system, so additional hardware purchases aren't required.  The software alternatively can be loaded onto an existing POS system.

Digital identity contracts probably will account for most 2015 revenue.  We estimate sales will advance 36% next year to $45 million.  The new technologies may contribute $2-$3 million of that.  Earnings (fully taxed) could improve 21% to $.85 a share.  Tax loss carry forwards will shelter 2015  income, supplementing cash flow.  Those savings probably will run out in 2016.  Faster growth is possible if the new lines gain momentum or the digital identity segment wins lots of new business.

SuperCom may pursue another acquisition in the near future.  The company previously authorized the sale of $50 million in stock with a shelf registration.  The target could triple SuperCom's sales, according to the company.  It also would enable the company to penetrate Western electronic identification markets.  SuperCom indicates the target is very profitable and would be immediately accretive to earnings.  It's unknown why the target is being sold, although reports suggest the owners are looking for money.  SuperCom's stock price may move sideways or even decline somewhat until the transaction is formalized, or a decision is made not to pursue it.  Assuming the contemplated transation does not go through sales could attain $75-$100 million in 2-3 years.  Earnings could increase to $1.15-$1.55 a share. SuperCom notes that its 5-year goal is sales of $250 million.

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