RADCOM Ltd. (RDCM) Q4 2013 Earnings Report, Transcript and Summary

Welcome to the Radcom Ltd. Fourth Quarter and Full Year 2013 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, February 5, 2013. I would now like to hand over the call to Ms. Noga Fisher. Ms. Fisher, would you like to begin?

Yes, thank you Rachel, and hello everyone. With me today are Radcom's CEO, David Ripstein; and CFO Gilad Yehudai. By now, we assume you have seen the earnings press release which was issued earlier today. It is available on all the major financial news feeds. Before we begin, I'd like to review the Safe Harbor provision. Forward-looking statements in the conference call, involve a number of risks and uncertainties, including but not limited to, product demand, pricing, market acceptance, changing economic conditions, product technology development, the effect of the company's accounting policies and other risk factors detailed in the company's SEC filings. The company does not undertake to update forward-looking statements. In this conference call, management will be referring to certain non-GAAP financial measures which are provided to enhance the user's overall understanding of the company's financial performance. By excluding certain non-cash charges, non-GAAP results provide information that is useful in assessing Radcom's core operating performance, and in evaluating and comparing our results of operations on a consistent basis from period to period. The presentation of this additional information is not meant to be considered as a substitute for the corresponding financial measures prepared in accordance with Generally Accepted Accounting Principles. Investors are encouraged to review the reconciliations of GAAP to non-GAAP financial measures, which are included in the quarter's earnings release. Now, I'd like to turn the call over to David. Go ahead, please.

Thank you, Noga, thank you all for joining us today. The fourth quarter was a strong end to a very good year for Radcom, in which our top and bottom line results grew strongly, in line with our plans. For the quarter, our sales were $5.7 million and our operating income was about $200,000. For the year, our sales went up by 30% to over $20 million, while decreasing our operating expenses by 9%. Just as important, our book-to-bill ratio for the second half of the year was very strong, well above one, with booking for the fourth quarter even stronger than the third. This, together with an excellent short-term pipeline of opportunities, give us a good visibility as we enter 2014. All of this demonstrates our positive momentum. Our success at taking advantage of our growth drivers, improving our efficiency and aligning our solutions with emerging trends. I'd like to go into each of these factors into more detail, to show you why we are excited about our prospects. The first factor, is our large customer base. We currently have over 70 customers worldwide, including many tier-1 and tier-2 operators. This is a real asset, which we have built over the years. Each customer offers the potential to bring us the flow of new orders and maintenance contracts over time. We are also benefiting from our first investment in Latin America and Asia, the regions, where there is the most mobile phones usage, and the fastest growing LTE activity. We are one of the few companies in our industry, that has had a proven LTE solution, with sales and deployment already on the ground. The combination of our local presence and an excellent solution is paying off, with good sales and lots of opportunity in the (inaudible). At the same time, we are very excited by positive market reaction to moderate. This is a break from our new product, that we announced just last Monday, but it is installed already with excellent results in a number of websites. The MaveriQ addresses two important trends; first, the massive growth of data traffic. As strong as data traffic is today, it continues to grow amazingly fast. By 2015, there will be twice as many network devices as people in our world. This is driving the telecom industry into the big data era, making it almost impossible to achieve good quality of service, without the right tools. MaveriQ is the best tool by far, for this environment, of the (inaudible) with massive capacity, it can easily handle today's traffic levels, and is ready for growth. The MaveriQ is also the industry's first (inaudible) system, designed for NFV, network function virtualization. The idea behind the NFV, is to move as many sections as possible into software, to make the network more flexible and scalable. Operators have begun to adopt this architecture, deploying arrays of standard servers, and then using them as the basis for software-based solution, rather than proprietary hardware solution. Our new MaveriQ technology is designed for this virtualization environment. Beside the advantage that [brings] the customer, the fact that it is better software, means that the system costs us less, and is shorter to deploy. This increases our modules and reduces the time for booking to revenues. This is the main reason, we have increased our target margin to over 75% for the long term. In addition, moving to software package makes it much easier for other vendors in other market segments to add our technology to theirs. We believe, this will be a key to developing our OEM channel, which will increase our addressable market. Our MaveriQ-based projects have been very successful and our short-term pipeline is full of new opportunities. So we are confident, that MaveriQ will become a powerful new sales engine, while also improving our gross margin and time to revenues. So [that's it] for the fourth quarter. Our base business continues to grow, in line with our plan, and is ready for further growth. We are benefiting from the LTE buildup, especially in Latin America and Asia. The MaveriQ has pushed us far ahead of the competition, and is opening new doors, while improving our margins and revenue recognition. Finally, with a strong backlog and an excellent pipeline of opportunities, we are entering 2014 with improved visibility. We look forward to reporting good results throughout the year to come. With that, I will stop and turn the call over to Gilad, to discuss the financial results. Gilad, please?

Thank you, David, and hello everyone. Since you have the press release before you, I will just go over the highlights, to give you a better understanding of our results, I will do in terms to non-GAAP results, which excludes share based compensation for all periods. Revenues for the quarter were $5.7 million, up 20% compared with the third quarter of 2013. For the full year, sales were $20.5 million, up 30% compared with 2012. This is in line with our plans. Gross margin for the quarter and for the year as a whole, was 61%. This is on the low side of our current normal range. In the year ahead, we will continue to transition from older, lower margin projects to higher margin projects, some based on MaveriQ, that we can deploy much faster with better margins. As David mentioned, we expect that our shift to the MaveriQ will enable us to increase our gross margins significantly, with the lower cost of goods and a faster and easier deployment cycle, we have set a long term target for the gross margin of approximately 75%. Our operating expenses for the quarter were down by 5% year-over-year, and for the full year, they were down by 9%. The current level is right for supporting our business and growth plans, which together with the higher gross margin, should improve the higher bottom line, as sales increase. With good revenues and reduced expenses, we generated a net profit of $187,000 for the quarter or $0.02 per share. For the year, we were able to cut our net loss to $921,000, this is down 83% compared with 2012, so we are moving in the right direction. Turning to the balance sheet; all parameters are in line with our expectations. Our cash balance is stronger than it was during 2012, demonstrating that we have become more stable. Our backlog, as of the end of the year, was approximately $18 million, the backlog includes the gross amount of the orders that we have booked, but not yet recognized as revenues. More importantly, our booking for the second half of the year, and especially in the fourth quarter, was extremely strong, well above 1, giving us good visibility as we enter 2014. Back to you, David.

Thank you, Gilad. So that's it for the fourth quarter. We continue to make progress in line with an achievable plan, aimed at generating continued growth and profits in the year ahead. Thank you for your support, and we look forward to reporting our progress. With that, we would be happy to take your questions. Operator?

Thank you. [Operator Instructions]. The first question is from Abba Horwitz from Old School Partners. Please go ahead.

Hi, good afternoon. First of all, congratulations on a much improved quarter, and also the guidance. I just wanted to -- let me get it out of the way, a small detail. What do you expect the share count to be for 2014? It just obviously keeps going up because of the secondary that you did. Can you give me a sense of what the share count will be, for modeling purposes?

This is Gilad speaking, we currently forecasted to have sufficient cash balances for 2014, so we do not expect any fundraising process, so the share count should stay the same as it is today.

So, around 8.3 million shares?

That's on a diluted basis, yes.

Yeah. Fully diluted basis for the year?

Right.

Okay. So, it won't change much. Okay, fair enough. Now, on the MaveriQ, what do you charge for it, what is the current penetration, and what kind of number are you looking at for this year, in terms of selling this product?

Well basically, we are aiming most of our opportunities with MaveriQ. The MaveriQ is a new technology that supports most of the existing interfaces in technology today. So, I don't have a focus with percentage, but I see most of the opportunities covered by the new technology.

Okay. And you've already sold this technology into the system?

Yes we did. I can say that, also most of the booking in Q4 was with the MaveriQ.

When you say bookings, but not sales?

Yeah.

Okay. So would that mean -- before we get to that, and what do you charge for the MaveriQ? How does the price of the MaveriQ compare to the legacy products?

Well basically, it's a different model of charging, but at the end of the day, the expenses from the customer side will be the same.

Okay, I am not sure I understood. What do you mean by that?

What I am saying, you know, is that -- if our customers, the telecom, put a specific budget for service assurance, I don't expect that to change, because we change our technology, or we improved our technology. But the big message behind the MaveriQ is that it is a software tool. So the part of the hardware and the part of the costs from our side was reduced dramatically.

Okay. And is there a recurring revenue part to the MaveriQ?

Yes there is. Our model is based on repeating sales. It means that after penetrating the customer, and he starts using the system, then we are getting new opportunities by the fact that you need more capacity, that is one thing. The other thing is, changing technology, for example, moving from third generation to the fourth quarter, to the LTE or moving to the voice-over LTE. And of course maintenance contracts and services.

Okay. So would it be fair to say that in theory, the quarter that you had now, the Q4, if you would say, hit your 75% target, so in theory, you would be actually making another ten-tenths of EPS in the quarter, given that I would assume, it all flows to the bottom line? Would that be correct (inaudible) and assumption?

Yes. Basically, if we had 75%, then yes, your assumption is correct.

Okay. All right. So this is a very powerful product for you, the MaveriQ. And one other thing you said on the call, you said that you are ahead of your competition. Could you talk a bit about that, because you put out these releases on MaveriQ and on the first take when I read it, I didn't think much of it. While its another new product, but it seems to be an extremely important product for Radcom, and certainly an important product for the industry, that can really change the makeup of your company dramatically in a positive way. So may be you could just tell us about the competition and why you feel that you're ahead of them?

We will answer the question with two dimensions. The first dimension is the feedback that we are getting from our customers, from our better sites. This is very important for us to feel the customer, who knows that we appreciate the technology, when compared to our competition. The [figment] is not only by [wordings], but also as I said, the booking in Q4 was stronger than Q3, and in total, the second half of the year booking was very good. This is one dimension. The other dimension is the capacity (inaudible). Since the network demands more capacity, also in our industry, you need a stronger product. And all the players in our market, all our competitors need to adjust their technology to support the capacity. If you cannot support the capacity of the network, you are out of the business. So this brings, and based on the understanding we have of our environment and our competition, we feel that this technology is very strong, and as I mentioned, ready for the NFV as well.

Okay. Really good. Will this also solve some of the lumpiness in your business?

It for sure, will increase it.

Increase the lumpiness?

Excuse me, will reduce it.

Oh, okay. That's very good. Okay. Beautiful. Thank you very much and congratulations on a really important I think moment for the company.

Thank you.

[Operator Instructions]. There are no further questions at this time. Mr. Ripstein, would you like to make your concluding statements?

Thank you, Noga. Thank you, Gilad and to you all for participating in this conference call.

Thank you. This concludes the Radcom Ltd. fourth quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.