RADCOM Ltd. (RDCM) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Second Quarter 2015 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, July 21, 2015. I would now like to hand over the call to Ms. Noga Fisher. Ms. Noga Fisher, would you like to begin please?

Hello, and thank you, and thank you all 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 newsfeeds. We are currently experiencing a technical difficulty which has prevented us from putting the reference slideshow, which we had prepared, on to our Web site. We will try [ph], and we will carry out the conference call without it. Thanks for your patience. 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 our 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, Noga, and thank you all for joining us today. Our revenues for the second quarter were 4.8 million, which is lower than we expected. The shortfall was due to the slowdown in the decision-making process regarding a software project in Russia that we had expected to close during the second quarter. For the first six months of the year, our revenues were 11.2 million, which is ahead of last year. All collection in the quarter were particularly strong, increasing our cash balance by 5.9 million. And now gross margin for the quarter remained strong at nearly 75%, giving us a six months gross margin of 79%. We are now able to increase our long-term target for the gross margin to 80%. Our equity and working capital are both up, except the ratio of our equity to total assets has now being going up for seven straight quarters. So RADCOM is strong and healthy, and we remain on track for delivering growth, compared to 2014. I'd like to spend a few minutes discussing the reason that we are so confident about the future, the potential we see for our MaveriQ product in the new markets that it is opening for us. Last week, we announced that we had finished reutilizing the MaveriQ, making what we believe to be the best fully NFV-compatible solution on the market. This is already opening up a new scale of opportunities and expanding our geographical focus into additional regions, especially in the U.S. NFV or Network Functions Virtualization is the new platform that will enable the next phase in the telecom markets' development. With the NFV platform, networks are built on standard [ph] servers, rather than proprietary hardware, and services and application around our software. This is similar to how people used to buy standalone cameras, while today the camera is an application on a smartphone. As a result, NFV application are faster and easier to deploy, more scalable, and more flexible. For operators, this translate into reduced CapEx, reduced OpEx, and reduced time to market for launching the new services. Just as important, it will enable operators to keep up with the ever-increasing volumes of traffic on their networks. With our MaveriQ customer feel the need for a robust [ph] CEM solution that can keep up with this level of traffic. It is easy to install and ready for the transition to NFV. This capability has made MaveriQ an excellent solution for operators, and made RADCOM an excellent business partner for the NFV platform vendors. We need to be able to offer a good CEM as part of their proposals for top-tier customers. The combination of the right product and the right partners bring us into a whole new scale of opportunity. The NFV transition has now begun. Some of the top-tier operators that have announced their NFV plans are AT&T, Telefonica, Telstra, and Verizon. As a result, informatics focus for the NFV market will reach 11 billion by 2018. Just as important, they predict that the software application, including CEM will account for more than 90% of the pie. This is obviously very good for RADCOM. To take full advantage we have invested a massive effort during the past two quarters to position RADCOM as the leading CEM provider for the NFV environment. This has involved the development of a new software architecture for integrating the MaveriQ software into the NFV. The result is a fantastic product that is taking us into new geographical regions, especially in the U.S., where most of the NFV activity is taking place. At the same time, we continue to work on opportunities in Latin America, and the Far East, where their transition to LTE continues to bring us MaveriQ customers. We cannot predict the future, but we feel confident about our direction, and excited about our potential. 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 financial results in front of you, I will just go over the highlights. To help you understand the results we'll be referring mainly to the non-GAAP numbers, which exclude share based compensation. Revenues for the quarter were $4.8 million, down slightly from the second quarter last year. As David said, this was due to the slowdown in the decision-making regarding a particular deal. For the six-month period, revenue were $11.2 million, compared to $10.4 million in the first half of 2014; below what we had expected, but still up by 7%. Our gross margin was high again in the quarter, about 75%. For the six-month period, gross margin was 79%, which was a record for us. Given the opportunities in our pipeline, we now feel comfortable updating our long-term target for the gross margin from above 75% relative [indiscernible] for the past year and a half to 80%. Our gross R&D on a non-GAAP basis is down 13% from last year. The chief scientist office participation is $148,000, reflecting catch up amounts that we have now actually received on Q2 from 2014 grants. As to the grants that we expect to receive for year 2015, the chief scientist office is still behind schedule. It is very reasonable to assume that we will see a meaningful catch up over the next two quarters. Expenses for sales and marketing, and general and administrative remain under control, and are at the right level for our company at this stage. Taken as a whole, our operating expenses went down by about 12% year-over-year. We were able to deliver $627,000 [ph] operating profit on a non-GAAP basis despite the lower revenue. This is more than double its level of the second quarter of 2014. Our operating income for the first half of the year is up nearly 10 times compared with last year, from just under $200,000 to nearly $2 million. So we are well under control and operating according to a healthy model. The next item is the financial expense, which has been fluctuating from quarter-to-quarter along with the Brazilian real and the U.S. dollar. The real/dollar exchange rate was 2.66 on December 31st, went all the way to 3.2 on March 31st, and finished the second quarter at 3.1, giving us slight financial income. For the second quarter we recorded $78,000 in financial income. For the first half we recorded $374,000 in financial expenses. Net income for the quarter on a non-GAAP basis totaled $605,000, or $0.07 per basic share. This is up 68% from the second quarter of 2014. Net income for the first half was $1.4 million compared with $608,000 for the first half of 2014. Turning to the balance sheet; our cash and cash equivalent as of the end of the quarter were $9.9 million, reflecting very strong collections. This compares with just $4 million at end of Q1. Our inventory level has decreased from $2.7 million at the end of 2014 to $1.5 million as of June 30. This reflects our ability to execute our projects, and the transition to a software model. Our key balance sheet ratios have improved significantly over the past few [ph] years. I think that this shows the fundamental strength of our company better than almost anything else we can present. Back to you, David.

Thank you, Uri. So that is for the second quarter. With a future-proof solution which suit market needs for robust performance, together with strong partners and a healthy pipeline, we believe that we are positioned for growth. As always, thanks for your ongoing support, and for participating on this call. With that, we will be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Your first question is from Amit Dayal of H.C. Wainwright. Please go ahead.

Thank you. Hi, David. Hi, Uri.

Hi, Amit.

Hi.

Just to begin with, I have a few questions; this Russian deal that was delayed, can you give us a sense how big this opportunity is for you, and whether you think you can close this in the third quarter?

Yes. Amit, this Russian deal is a software and for voice over IP technology. Basically we signed a contract with the operator and we were sure to get this software deal in Q2. It catch us by surprise. So we are evaluating now when we hope to catch up with this deal this quarter, and if not in Q4. We don't know exactly the reason. We know the official reason of the delay, but we need to validate what's happened there. The size is between 1 million to 1.4.

Okay, perfect. So if you look at our model, we've been modeling for around 6.5 million per quarter run rate. Is that still a fair projection for 2015 using that level of run rate for you guys per quarter?

Yes. Amit, we're avoiding ourself from providing forecast for revenues. So I prefer not to answer direct to your question, but we strongly believe that we will continue to grow all the parameters -- all the financial parameters, including the revenues.

Got it. So this new virtualized offering you just launched, do you expect contribution from this in 2015?

Yes, maybe I will a little bit elaborate on this new technology or additional layer of technology. We had a transition from hardware solution to a software solution a year, year and a half ago. What we did in the first half of this year is another layer, and the last layer to move the software to be fully virtualized. And we are now in a position that we can immediately install our technology on any virtualized environment. There are a lot of public information about operators that start who are working on NFV environment. And part of them see the CEM analytics side of the network as one of the things that they will purchase as part of building a NFV environment. So we believe there will be in the market this year deal or at least -- or maybe deals regarding NFV, and we hope to get at least part of the cake.

Got it. So this NFV offering seems to be -- and you can correct me if I'm wrong, more applicable to some of the advanced markets like the U.S., Europe maybe. Is that the right way to look at it, and is this going to be an entry platform for the opportunities in these geographies for you?

Exactly, Amit. The stronger operators, leading operators are -- especially in the telecomm are especially in the U.S. and also West Europe. And those are operators that are speaking today about NFV. And as I mentioned also in my brief earlier, this opened for us a new level of opportunities and a new geography, which is the U.S.

Great. And from a margin point of view, does this add to your already strong 80% gross margins or there's not much contribution -- additional contribution from NFV?

Part of the reason that we increased our long-term forecast for 80% is because we see opportunities in NFV, and NFV is software-only. From a RADCOM perspective it is software-only. So this is why we increased our gross margin target to be 80%.

Okay, got it. And just one last question in regards to the increase in cash that we saw in the quarter, almost $6 million; this is driven primarily by what?

We had a great collection, and this normally happen when the customer is happy and do not have issues with the technical solutions, so he pay. And that's what happened. We had a great quarter regarding collection that led us to increase almost $6 million in cash.

Perfect. Thank you. And I'll step back in queue.

Okay. Thank you, Amit.

Your next question is from Louis Moser [ph] of Mayfax Investors. Please go ahead.

Lauren, there seems to be a problem with the question.

Yes, Louis, please begin.

No, I said that someone has previously asked the question. So I put myself [indiscernible].

All right, okay.

Sorry.

The next question is from George Marima. Please go ahead.

Hi, good morning. On your forecast for growth, are you referring to year-over-year growth for 2015 over 2014?

Yes, the answer is yes. We said that our 2015 will be better than 2014.

Okay. And on these Tier 1 players that you mentioned, who are looking at NFV; the AT&T, Verizon, Telefonica, and somebody else, I forget the name; are you in talks with one or more of these folks?

I prefer not to expose more information around that. We are in a competitive environment, so…

Sure, sure. Okay, well, on the bigger opportunities that you are looking at, wherever and whatever they are; where are you on the process on some of these?

Again, I prefer not to answer on this question.

Okay. And on the pipeline or your backlog, how much visibility do you have into the back half of 2015 currently?

How much visibility I have for what?

The back half of…

For the back half of 2015 in term of revenues.

Yes. We have I think a strong visibility. We know what are our targets for this second half. And it seems that we have strong opportunities on this second half of the year.

And I believe it was either one or two quarters ago, you talked about ramping up your sales force. Well, what is your current sales and marketing force? And what was it six months ago till today? And what are your expectations for the remainder of the year?

Yes, we recruit few people in Asia Pacific, and EMEA. And so we basically recover the budget on this side of the world. We didn't finish the recruitment process in America, in Latin America and U.S., but additional to that, and I mentioned that in my brief is that we are working, because of NFV opportunities, the NFV market, we are working more with partners than we used to be. So the way I see my sales force, it's a combination of our sales people, but also a very strong very companies that we announced about them in the last few quarters, and that's a good combination.

Okay. And one last one is I recall from some previous calls, you guys have something in the order of I think 70 customers that you have done business with in the recent years, and you you've already sold a handful of them over the past couple of years, its new NFV solution. Where do we stand in terms of penetrating our existing customer base? How many are interested in this new solution, and is that the majority, only a handful, and…

Yes. Well, we're continuing the communication with existing customer, offering them upgrades to our new technology. A part of them are ready to do their investment. They are doing their investment, and upgrading to the new technology. A part of them prefer to wait to budget these things. And so it takes time, especially in the wireline customer. Cellular customer are more flexible on getting the MaveriQ. So I think we are in a right path of this process. In parallel to that, in 2015 we are more focused on bringing new customers, and opening new doors, and new territories. And there is a lot of activities that didn't turn yet into our sales, but a lot of activities in new countries, with new local partners, et cetera, based on the sales force that we recruit. And that will bring us new customer with the MaveriQ of course. I don't see us selling any more the legacy technology.

So it sounds like you're expecting some more bookings here in the not too distant future?

Of course. We expect in second half of the year a strong booking.

All right. Thank you, David.

Sure, thank you.

Your next question is from Josh Goldberg of G2 Investment Partners. Please go ahead.

Hi, guys. Two quick questions; I guess question one is, you talked a little bit about some of the orders that you got last year from MaveriQ, I think one was over a $4 million order; one was over a $3 million order. I'm just curious how much of those orders that you've publicized for the press release have been recognized as revenue thus far in the first half of 2015. And I have a follow-up.

Yes. If you are referring to Q3 and Q4 deal from last year, Josh?

Yes.

One in the LATAM and one in Asia Pacific, if I remember correctly.

Yes. No problem [ph].

So we recognized most of these.

I'm sorry. Did you say you recognized almost all of them already?

Yes, yes. You can say so.

Okay. And I know you don't want to talk about what you have going forward competitively, and we expect that. Obviously, you're talking about strong bookings in the second half of the year besides the opportunity in Russia. There's probably some other opportunities in front of you. Would you be able to at least tell us, without a number, let's say, how much has your pipeline grown right now versus a year ago at this time? Just in percentages or some way to give investors comfort that all this hard work, and the R&D, and the building of these new products, at least in your mind is translating into a much bigger pipeline than maybe what you saw six months ago?

Yes, Josh, I understand the question, but I would like to avoid giving the numbers, and even a percentage about the pipeline because -- I understand that the investor need to feel confidence, but I'm sure also competitors are evaluating RADCOM and maybe listen to the call as well. And I don't want to give any piece of information that can indicate what we expect to get from our investment in the last two quarters.

Okay. Could you talk a little…

Josh?

Can you talk a little bit about what the opportunities are in the U.S? I know you mentioned that you are entering the U.S. market. Is that more of a wireline or a wireless opportunity you have going forward?

Yes. Okay. Well, the NFV environment, the NFV opportunities, we'll see them especially in the cellular market and the cellular operators, as you know you have in the U.S. top four big Tier 1 operators, and some strong Tier 1 operators in West Europe bigger than anybody else. So when one of them will take a decision to buy an analytics tool or CEM tool, we are sure that we are with better positioning to fulfill this need. And you can imagine that if operator in this size doing an investment, the investment is relatively high; and the one that will get a deal will enjoy relatively a big number compared to the average deal in the industry.

Okay. Last one from me; on the RD credit on the government, you defer [ph] to say that for the year you should expect the similar amounts where you had last year?

Well, what happened is that the government doesn't have yet the budget. So we cannot provide any written commitment. So we were not to be able to recognize this income from the government, but we believe that it will be the same level of last year, and we still have to catch up from the first half of the year, so we probably will see in Q3, and if not Q3 then Q4.

Okay, great. Thanks so much.

Okay. Thank you, Josh.

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

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

Thank you. This concludes the RADCOM Ltd. second quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.