Announced Contract Wins Will Double SuperCom Share Price

Aug. 7.14 | About: SuperCom, Ltd. (SPCB)


SuperCom is a debt-free microcap supported by gross margins above 80%, recurring revenue streams, multiple growth channels, outstanding cost control, and a shareholder-aligned management team.

Large 2014 contract wins enabled by the recent acquisition of its much larger primary competitor are not yet reflected in SuperCom’s valuation.

I expect 2014 non-GAAP EPS of at least $1.54, a 120% increase over 2013. At the current P/E ratio of 14, the share price will double to $22 by spring.

If the current pace of contract wins continues, a P/E ratio of 20 and a tripled share price of $31 are plausible.

I have bought SuperCom (NASDAQ:SPCB) shares three times since Jaret Wilson's May 7 SA Pro article, and I am grateful to him for opening my eyes to this "Superb Opportunity". That article is only visible to SA Pro subscribers now, but Irit Jakoby's article from last September provides a good introduction to the company. I also recommend the December CEO interview from Lazarus Investment Partners.


As many of us on SA have seen with Micron (NASDAQ:MU) and its spectacularly accretive acquisition of Elpida, rapid changes in a company's scale, prospects, and performance can require a year or more to be reflected fully in financial reports and attract investment capital. This lag between events and reports provides an accumulation window for investors who understand what is happening. Seven months after SuperCom completed its purchase of OTI's (NASDAQ:OTIV) SmartID division, contract win announcements point to a 50% increase in 2014 revenue over the SuperCom + SmartID pro forma (and 350% over SuperCom's 2013 revenue). Below is a summary of the announcements:


Size (M)


$ 4.0

By 6/30/14


$ 25.0

"Majority" by 12/14


$ 3.6

"Majority" from 7/14-12/14


$ 22.0

"Majority" from 8/14-4/15

$ 54.6

Click to enlarge

This practice of announcing contract wins is new for 2014, and it is not clear to me from listening to the June conference call and reading the various SEC filings whether or not the announced contracts include the recurring component of this year's revenue stream. To be conservative, I assume in this analysis that all revenue for 2014 Q2-Q4 is covered by these contract announcements.

The precise definition of "majority" is "more than half", but I perceive the intended meaning to be "all but with some risk of exceeding the time frame". For this analysis, I boil "majority" down to "90% within the allotted time frame and the remainder in the next two months". I also assume that revenue is recognized more heavily near the end of the described time frame and that it begins ramping up about a month after each announcement. With that in mind, here is an aggregate view of my monthly revenue estimates by quarter:


Q1 '14

Q2 '14E

Q3 '14E

Q4 '14E


$ 0.5

$ 3.5

$ -

$ -


$ -

$ 2.5

$ 7.5

$ 12.5


$ -

$ -

$ 0.7

$ 2.5


$ -

$ -

$ 1.0

$ 4.5


$ 5.3

$ 6.0

$ 9.2

$ 19.5

Click to enlarge

$12.4M and $7.0M of the announced contracts fall into Q1 and Q2 2015. Presumably those two quarters ultimately will include additional revenue from contracts not yet won.

If my allocation of revenue from the announced contracts is close, the Q3 and Q4 results will be blockbusters with 50% and 100% quarter over quarter growth, respectively!

I plan to refine my assumptions about the timing of revenue recognition and the scope of the contract win announcements at the next results conference call. Does SuperCom typically recognize revenue evenly as a project proceeds, or does the revenue tend to arrive more toward the end as I have guessed? Do the contract win announcements include all expected sources of revenue including maintenance renewals? What else might we see in 2014?

GAAP versus Non-GAAP

With last year's SmartID acquisition, SuperCom acquired some amortizable balance sheet assets that reduce GAAP income but have no operational effect. To reflect operational performance more meaningfully, SuperCom has begun reporting non-GAAP figures that back out the amortization. The non-GAAP figures also back out the substantial income tax credits that come from a large (~$50M) carried net operating loss. I agree with management that the non-GAAP numbers explain SuperCom's performance more effectively than the GAAP ones do, so I will focus on non-GAAP figures here.

Gross Profit

Q1 gross margin was 84%, and CEO Arie Trabelsi said in response to a question at the results conference call that the team had planned to be there by Q3 but that a smoother than anticipated integration with SmartID had accelerated the timeframe. From this I presume that management generally expects to continue earning high gross margins.

In another question, President Ordan Trabelsi explained that recurring contract elements earn higher margins than non-recurring ones do. He summarized his answer by saying that "recurring revenue should be a bit higher in margin than the average".

With a desire to be conservative and the expectation that announced contracts will yield a greater proportion of non-recurring revenue than was realized in Q1, I have used 80%, 76%, and 72% for Q2, Q3, and Q4, respectively.

Operating Expense

Q1 operating expense was $2.9M. Arie responded to a question about the high R&D expense of $1.3M by indicating that much of it pertained to work capitalized in 2013 in anticipation of contracts won in Q1. Ordan indicated that SuperCom expects to spend $0.5M quarterly on R&D going forward.

Arie reminded us that the hands-on project work fits into direct cost and will not affect operating expense. He did note that "sales and marketing in general will be increased in accordance to the revenue especially where people are getting commission out of sales".

Finally, Ordan indicated that the newly integrated G&A team can support $50M in annual orders and that "we still have a lot of capacity to handle without growing our cost structure".

In consideration of these factors, I allowed most of the R&D decline to reflect in Q2 and added $0.4M in each of Q3 and Q4 to account for success-based sales expenses: $2.2M, $2.6M, 3.0M. The $0.4M is a wild guess that I hope is well beyond what is needed.


Putting my revenue, gross margin, and operating expense estimates together, here's what I expect to see in fully diluted earnings per share:







$ 40.0

$ 19.5

$ 9.2

$ 6.0

$ 5.3

Direct cost

$ 9.7

$ 5.5

$ 2.2

$ 1.2

$ 0.9

G profit

$ 30.3

$ 14.0

$ 7.0

$ 4.8

$ 4.4

G margin






Op expense

$ 10.7

$ 3.0

$ 2.6

$ 2.2

$ 2.9

Op income

$ 19.4

$ 11.0

$ 4.4

$ 2.6

$ 1.4

Op margin






Net income

$ 20.6

$ 11.3

$ 4.7

$ 2.9

$ 1.7







Diluted EPS

$ 1.54

$ 0.85

$ 0.35

$ 0.22

$ 0.13

Q over q




Click to enlarge

Share Price

I think SuperCom's share price is likely to rise a lot over the next eight months. If no more contract wins are announced before the March 2015 reporting of Q4 and full-year results, SuperCom's share price may not benefit from the multiple expansion that a company with high growth prospects would enjoy. In that scenario, today's 14 P/E ratio would yield a $22 share price.

If SuperCom continues to demonstrate rapid sales momentum, investors are likely to pay up for the stock. A 20 P/E ratio would triple the current price to $31.


SuperCom reports financial results more slowly and in a more variable time frame than most companies:


Results Date


Q2 2012



Q3 2012



Q4 2012



Q1 2013



Q2 2013



Q3 2013



Q4 2013



Q1 2014



Click to enlarge

The new CFO may improve reporting performance, but I do not mind the status quo. In the absence of guidance and with the new practice of reporting contract win amounts, this lag provides attentive investors with more time to analyze, assess, and accumulate.

Overall, if we don't put too fine a point on things, I am confident in the share price direction (up), magnitude (a lot) and timing (soon). Given the coiled spring of pending contract revenue, I recommend accumulating before the next earnings call, which should occur in 1-2 months.

SuperCom is a high-conviction holding for me, and at 9% of capital, my position is sized accordingly. If it drops this month in a market downturn, I will likely add.

Disclosure: The author is long SPCB, MU. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.