RADCOM Ltd. (RDCM) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Fourth Quarter and Year-End 2014 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 03, 2015. I would now like to hand over the call to Mr. David Kahn [ph]. Mr. Kahn [ph], would you like to go ahead?

Thank you for joining us. With me today are RADCOM's CEO, David Ripstein; and CFO, Uri Birenberg. 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 would 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 its results of operations on a consistent basis from period to period. The presentation of this additional information is not meant to be considered 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 would like to turn the call over to David. Go ahead, please.

Thank you, David and thank you all for joining us today. I am proud to report one of the best quarters in our company’s history, revenues of $7.2 million, a 75% gross margin, $1.8 million in net income on a non-GAAP basis and $2.3 million in positive cash flow. This was topped by an all time record for our bookings which points to continued growth in 2015. For the year, we posted $23.6 million in revenues with a $3.3 million net profit on a non-GAAP basis and ended the year with $6.8 million cash in the bank. To put this into perspective, just two years ago we posted a net loss of over $5.5 million and our cash balance last year ended at just $1.2 million. So we have completely transformed the company over the past two years. Through this period of time, we have succeeded in building a strong stable platform and as you can see we have succeeded in leveraging the platform to grow ourselves, margins and profits. Our success is due to first, our correct read of the market which led us to develop the right product for market needs. Second, our transition from a harder model to a softer model which has increased our margins, reduced the product [ph] time and improve our collection cycle and, third, our streamlining process which has reduced our breakeven point while improving our execution. I’d like to expand on these factors to extend our confidence as we look to the future. First, our read of the market. Two years ago when data projects started growing at such an incredible rate, we understood that quality of service would become a big roadblock for operators. We understood that LTE networks together with their corporate data services would become so complicated that it would be almost impossible for operators to trace and solve the quality programs atleast with all the right tool. The right tool would have to be much more robust than anything on the market. It would have to be able to handle higher volumes, higher speeds to navigate complex networks and to analyze trends. This was the low operators to identify problems and results even before the customer noticed, improving retention and reducing churn. In addition, two years ago as we began to develop the product, we realized the advantage of implementing these features in software rather than hardware. The software solution that could be deployed on startup service would make deployment faster and less of a risk while reducing our need for inventory. It would also make it cost effective and easy for our customers to make the transition to neutralize energy environment which we strongly believe will become the next big telecom resolution. This product became the MaveriQ, and we started selling it exactly one year ago. In this short time it has become a big success. Our timing was perfect, just as LTE network deployment began picking up speed in our target markets and the LTE market has a long way to grow. As I mentioned last quarter, global mobile supplier has 600 operators in 168 countries are investing in LTE today. And analysts expect that 80% of subscription in APAC will be LTE within five years. So this will present a huge opportunity for RADCOM that we are eager to address. The market is excited about the MaveriQ. Operators say that it is easy to install and easy to use and that it brings an immediate improvement in the customer retention. We see huge opportunity in deploying our MaveriQ Solution to our existing customer. So far, six of them have installed the new technology and three of those have already given us expansion orders including the two deals above $4 million, one at APAC and the other in Latin America that we announced earlier. With a clan [ph] base of over 60 operators, many of whom are deploying LTE networks you can see the potential and do the math, saying that I don’t want to make it sound easier than it is. Operators are tough customers every sales requires a big effort and success is hard to predict and never guaranteed. But we are doing great and expect to continue the momentum throughout 2015. The second element of our success is the transition from harder based business model to a softer driven model. So far this has increased our gross margin from the low sixties in 2012 and 2013 to 71% for 2014 and we are on track with full confidence throughout our long term targets above 75%. The higher growth margin has a number of positive effects, obviously to improve our net profit at any level of sales; just as important it reduced the time for booking to deployment, which makes the transition easier and less costly for the customer, while giving us more predictable revenues and reduce cost of sales and improved collections. The last element is the streamlining process that we have been implementing over the past two years. It has reduced our operating cost substantially, reducing our breakeven point. From an operational point of view it has also improved our execution leading to more satisfied customers, few mistakes and faster deployment. In short, the process has built us into a stronger, higher quality organisation. In summary, following two years of steady growth we have posted the best quarter in our history and are well positioned for additional growth in the year ahead. Our platform is strong, our plan is working, our markets are stable and we are optimistic as we look to the future. With that, I’ll stop and turn the call over to Uri to discuss the financial results. Uri, please.

Thank you, David. Since you have the press release in front of you, I will just go over the highlights. To understand [ph] the standard results, I will be referring mainly to non-GAAP numbers, which excludes share based compensation as well as a one-time non-cash write off mainly related to inventory and related assets, taken this quarter that I will further discuss in a few minutes. Revenues for the quarter were $7.2 million, the highest level in many years. This is up 26% compared with the fourth quarter of year 2013 and 19% compared with the third quarter. About 50% of this was from sales of the new MaveriQ. For year 2014 as a whole, revenues were $23.6 million, up 16% from 2013. In cost of sales, as you can see we have taken a $2 million non-cash write off primarily related to inventory and related assets, mainly due to a dispute with a customer related to legacy equipment delivered in year 2010. Since we are now focussed on our software based solution we are left with an inventory of legacy products and projects at reduced value. We decided to do this one time write off to clear the way for an even stronger 2015. Excluding this one-time write off, gross margin for the quarter was 75%. On a GAAP basis which includes the one-time write off the gross margin was nearly 50%. For 2014 as a whole, gross margin on a non-GAAP basis was 71% and on a GAAP basis it was 63%. In general as we have been saying for the past few quarters the shift to a softer model is making a permanent improvement to our gross margin and we have established a long term target above 75%. In the meantime the exact gross margin for any one quarter will depend on the mix of sales. Our General and administrative expenses remained steady again during the quarter. The increase in sales and marketing reflects the extra commissions and bonuses due to the higher level of sales, plus a one-time commission asset write off connected to the write off I just spoke about. Over the next year we expect to keep the same level of expenses with the exception of the sales and marketing department which we expect to continue spending to take advantage of the potential in our market. In fact, over the course of the last month, three sales managers joined the sales team software. With a higher gross margin and a stable operating expenses, operating income on a non-GAAP basis is $2.25 million compared with $273,000 in Q4 2013, which is more than 800% increase. Our financial expenses were $280,000 compared with $86,000 in the fourth quarter last year. This relates primarily to changes of the exchange rate between the dollar and the Brazilian Real and other currencies we use. On a non-GAAP basis net income for the quarter totaled nearly $1.8 million or $0.22 per share, this is up 11 fold compared with the fourth quarter last year and an all time record for us. As David mentioned, this is our fifth straight profitable quarter. For the year, net profit totaled a record of $3.3 million or $0.40 per share, compared to about $900,000 net loss for year 2013. So we are in a completely different position than where we were this time last year and we believe the best is still ahead. Turning to the balance sheet, all parameters are in line with our expectations. As of the end of the quarter our cash-and-cash equivalent totaled $6.8 million, up 51% from the third quarter. Cash has increased by $5.6 million in just four quarters, positioning the company in a completely different place in terms of stability and flexibility. Back to you, David.

Thank you, Uri. So that is for the fourth quarter. We are very proud of our progress to date and continue working to deliver on the opportunity. Thank you for your ongoing support and for participating on this call. With that we will be happy to take your questions. Operator?

Thank you. [Operator Instruction] The first question is from Amit Dayal of H.C. Wainwright. Please go ahead.

Thank you, good morning guys. Congratulations on the strong performance again.

Thank you, Amit.

Just in regards to the gross margins you know we’ve seen gross margins fluctuate between say 60, mid 60% levels to the mid 70% levels, part of that was probably driven by you know the mix of hardware/office sales. Going into 2015 just from a modelling point of view where should we be looking at, you know gross margins coming in, in the 70% range or will there still be a little bit volatility between you know the different quarters I guess on the margin side?

Amit, good morning and thanks for joining. Yes, there is and there will be a difference in quarter compared to some other quarter and related to the gross margin. So I suggest to look on that as more of the trend than just to focus on a specific quarter. So in this year we finished the year with 71% and we said in the call that we strongly believe that we will continue to add our long term target of more than 75%, so I believe you can do some kind of an assumption that will be in between.

Understood. You know you spoke about migrating towards a software model now, how much of that is potentially done and you know are most of the sales in 2015 going to be software sales?

Yes specially in this Q4 booking we had meaningful amounts of license and pure software, so I strongly believe that this trend will continue as more customers will adopt the moderate solution and will – this will give us the opportunity to charge more for license and less for hardware.

Okay. You know your revenues are trending you know in the right direction nicely, almost sequential growth every quarter. Is there any seasonality that we should expect you are migrating towards the new model in terms of revenue generations, so I’m just trying to look out over the next four quarters, can we expect the growth trend to remain impact or should – or can there be some fluctuations I guess in terms of…

Yes, Amit for our business and taking into consideration the company size there can be always fluctuation. So again, like for the gross margin I suggest to look on the trend, I cannot tell better than that.

Right. Understood. Is there any possibility we can provide some topline growth expectations for 2015?

Can you repeat that question?

Your growth expectation just from a percentage perspective you know…

No, it’s very hard for us and we would not like to give a forecast, but a strong booking and self activity on – we had a strong booking as I said a record booking in Q4 and a lot of self activity but currently we have based on that we are very optimistic on the revenue side so this will probably influence the bottom line as well. And again, we are not in a situation that we can provide accurate forecast.

Understood. And sales in the U.S. like can you break out what contribution you saw from U.S. sales in the fourth quarter and what your expectations are for U.S. sales in 2015?

Yes, as a reminder our legacy target market are Latin America and Asia Pacific but in the last few months we took a decision to invest in our efforts, in our certain marketing efforts a little bit more in the U.S. So we are increasing our efforts in the U.S. Currently in 2014 U.S. was something like 10% of our income and something similar related to our booking.

Got it. Thank you, David.

The next question is from Peter Eviac [ph] a Private Investor.

Yes. Good morning gentlemen. And congratulations on your very strong quarter, your increasingly strong sales and income results throughout the year. As the commentator mentioned on the small investor in the Chicago area, -- my due-diligence as a relatively new owner of your common stock and I appreciate the time in this conference call. I’m particularly curious about one thing. Your Company issued a press release on November 20th of last year. It had mentioned the good news that you signed a $4.3 million purchase order with an existing Tier 1 APAC customer on your extensive LTE MaveriQ solution and my complements on new development as a unique product which obviously appears to be very well needed by the industry. For the quarter that you just reported for that purchase order of $4.3 million, was that contributing factor in terms of sales and profitability or is that something that you see becoming actuality for sales and profits for 2015?

Okay. First of all, nice to meet you.

Nice to meet you too sir.

We announced deal in APAC versus the tragic deal the way we see it. And we didn’t recognize the deal in APAC into revenue in this quarter, so we expect to do it in this first half of 2015.

What I misunderstood is that, so you are going to show additional revenue from that purchase order in 2015 as well as some already reported for the fourth quarter?

In Q4 we didn’t – we did not…

Oh, you didn’t?

We didn’t recognize these deals. We were not able to. So we plan to finish our obligation to discuss amount to be able to report the revenue from it in the first half of 2015.

Okay. That’s very interesting for you to bring to my attention as well as the others on the conference call. Furthermore, is it common place then when you issue a press release as such, such a positive development for your company for new business generated that it typically takes months time for that to be seen as actual revenue?

Yes. This is the common practice in our industry that after we are getting purchase order we need to sometime shift the equipment, install it, and passed acceptance test from our customer, and that process take time.

Okay. Because you have follow-up press release on January 5th of this year and congratulations on that also for the signed expansion order of $4 million. So that something within the first half of this year which you hope to be show that’s actual reported revenue?

For the LATAM deal that you just mentioned we recognize around 130%, 135% of it in Q4 in this result that you see in [indiscernible] and they’re once again is planned for this first half of 2015.

Okay. And another question if I may, the big fish in the sea, the best way to put in the United States for the AT&Ts, the Verizons, the Sprints of the World and so forth, your MaveriQ solution, which seem to me that would be highly beneficial for no standpoint that have in the uppermost customer service and particular customer retention. Are they companies particular would you mention expansion plans at least pursuing more business opportunity in United States? Are they on your radar screen?

Yes. It is a good question. First of all in the past we target more Latin American and Asia Pacific. But since the big carrier in the U.S., at least part of them, have interest in the virtualization, in the NFV and we consider ourselves as a pioneer in this area. So we put a target to work with operators in the U.S. as well and we are starting doing so. Saying that, I don’t want you to generate expectation that we will see revenue in the short term maybe even not in the long term, it’s a challenging target.

Well, it’s good to hear that at least the effort will be made and I wish you much good luck and success in terms of accomplishing actually sales from that. And then the last thing if I may, I don’t recall your company ever being a participant in any type of investment conference within the United States particularly you expand the visibility, they want to see your company especially with the great things that are happening from a sales and profitability standpoint now and even more so expectations in the future. Is that something that your company is striving to accomplish, to make these visits to America to participate in these conferences to get the name out more for RADCOM?

Thanks for this advice. I think you’re right and we need to increase our activity. And hopefully very soon we will announce the conference that we are going to participate in two months from now as I believe. So we will increase our activity in the U.S., our IR activity in the U.S.

Also a conference so without you needing to give me specifics, will that be something which is held in the United States?

Yes. We will issue FBR in a few weeks with the name of the – we would just need to get a final confirmation from this conference and we will issue the name and the date and everything.

That’s wonderful news. Thank you so much for your time. It’s been a pleasure.

Okay. Thank you very much.

You’re welcome.

The next question is from Jeff Cosman [ph] of Symmetry Peak. Please go ahead.

Good morning gentlemen. Great quarter. I was wondering how you feel about your current cash position. You’ve done a great job growing it recently and I’m wondering if you’re comfortable at the current cash position and its trajectory or do you think you’d like to raise some capital on the near term? Thank you.

Yes. We are very happy with the progress we made with the cash mainly because its shows that the customer is happy with our delivery and are paying and it’s really great for us to have this improvement in collection and in the cash share position. We do not have any plan to raise money.

Okay. Great. Thank you.

The next question is from Noah Steinberg of G2 Investment Partners. Please go ahead.

Hi. It’s Josh Goldberg. Congratulations on the good results.

Thank you. Good morning.

Can you hear me. I had two quick questions. I guess first, if you can just give us a little bit more color on the bookings and on the pipeline for the MaveriQ product? You mentioned that your bookings were at – I think you said, an all time high, a historic high, could you give us any more color on how strong the bookings were and you mentioned I think it was only a few customer, a handful of customers that have already bought the MaveriQ solution. It would seem to me that the opportunity or the addressable market for this MaveriQ solution could be many, many, many times bigger than what you have right now with your older Omni product. I just want to hear a little more about that?

So Josh, you’re right regarding the MaveriQ -- let me start with your question about the booking. We had a very strong quarter in terms of booking, basically towards the record quarter in our history. We are not delivering the numbers of the booking, but we were very happy from this number even taking into consideration that its – the last quarter of year, normally it’s the best quarter in term of booking. But this quarter was extremely high, so this covered your first question. Regarding the second question, we are in a transition mode or we are in a process of convincing our customer, existing customer to move from the legacy Omni-Q solution to the MaveriQ solution. It’s take time. I am really proud from with the last year six-customer that we did this process and especially I’m very proud from the feedback that we got not verbally but the feedback with the purchase order and the big purchase order from part of them. And it really gives us more confidence. So our target in 2015 in this year is to continue push this new technology to existing customer and of course also to target new opportunities with this technology.

Based on your pipeline it would seem like your bookings still continue to grow?

We hope that the booking will continue to grow and for the execution part and in order to take the leverage of the MaveriQ, we – as we’ve mentioned, we already start hiring more sales people and last – this month in January we had a three batch to the team and we push [ph] team ahead in order to execute the opportunity we have.

You’ve been on business for a while obviously you’ve had some years of losses, now you are showing some profits to reinvest in the business as you just said with some sales managers you obviously see a very, very bright future?

Yes. If it was a question then the answer is yes.

Okay. Great. Thank you so much.

Okay. Thanks.

The next question is from David Kleinberg of Globus Capital. Please go ahead.

Hi. Congratulations on the very strong results. I was just wondering with the recent announcement I guess it’s a couple of months ago of the Netscout combination with the communications business unit of Danaher which included another of your competitors Tektronix, so you had two competitors sort of combining there? You think that opens up some additional possibilities for you in some tenders where some of the customer may have included Netscout and Tektronix would need as a dual source solution, whether that combination will create some additional opportunities for you going forward?

Yes. There was meaningful consideration of the market when Tektronix was sold to Netscout. I think this has created some confusion in the market which is working to our advantage. And we believe it will continue for about at least six months, I mean, this is the best I can see. So for now it’s a very good news for us.

Okay. Great. Keep the good work.

Okay. Thank you.

[Operator Instructions] The next question is from Noah Steinberg of G2 Investment Partners. Please go ahead.

Hi. It’s Josh Golberg, again. I wasn’t sure if you reported this, but I know that also at the end of the year you report your backlog. Did you give us a sense of what is your backlog is at December 31?

We didn’t report the backlog, but for you to – because it’s a little bit -- number and because it’s a mix of all the new project, but what I consider book-to-bill this year was more than one, I think this is will help to…

Substantially [indiscernible]

Let’s keep it like that.

Okay. And obviously the backlog has a lot more of the higher margin software product going forward, correct?

No. It has much more from the new technology, yeah, you’re right.

Okay. Great. Thanks so much.

Follow-up question from David Kleinberg of Globus Capital.

Hi. Just one of the questions, maybe you can talk on the geographical basis. Are you seeing strength throughout the geographies and just to touch on that, I think you do a lot of work in Brazil and just wondering with the Real being weak versus U.S. dollar, would the sales have been even higher excluding some foreign exchange impacts that you probably saw?

Okay. From revenue perspective this quarter was mainly Latin America or the dominant market was Latin America. From booking perspective it – let’s say split equally between America, Asia Pacific and EMEA, so this is what I can share regarding geography. Regarding with the currency its, well, there is a mix from one side its helps us in the cost of our resources especially in headquarter in Israel and for example in the Brazilian office. From the other end its make our – it’s like the solution is a bit more expensive in those specific countries like Brazil, Russia and other that had some influence with the currency. In general I don’t see it as something that will have big influence on our number, so I think if we are end for one side and maybe loss a little in the other side, it’s ended up equally.

Okay. Thank you.

Okay.

Follow-up question from Josh of G2 Investment Partners. Please go ahead.

Hey, guys. I want to make sure I have more questions than David, I think a lot of the concerns were mentioned in an article that the lack of cash generation and in start of selling and possibility of raising more money and you’ve definitely answered a lot of those questions today with the – you seem that you’re not looking to raise money and that it looks like you getting to generate quite a bit of cash in 2015. Just based on your forecast for 2015, should there be any reason why you wouldn’t generate just as much cash or similar amounts as you’ve done in 2014?

Well, we are not giving forecast for revenue profit and also cash. What we said is that we predict that we will have a good 2015 and we will continue with the momentum. This is why we currently do not have plan to raise money. I would like to collect money from customer and of course to improve the business in all power matters.

There are no further questions at this time. Mr. Kahn [ph] would you like to make your concluding statement.

Thank you, David, thank Uri and to all of you for participating in this conference today.

Thank you. This concludes the RADCOM Ltd. fourth quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.