RADCOM Ltd. (RDCM) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Third 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, October 27, 2015. I would now like to hand over the call to Ms. Noga Fisher. Ms. Fisher, would you like to begin please?

Thank you, Laura 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. Please note that management has prepared a presentation for your reference that will be used during the call. If you have not downloaded it yet, you may do so through a link on the investor section of RADCOM’s website at www.radcom.com/investor-relations. If you have any trouble, please send Mark Rolston an email or at markr@radcom.com and he will send it to you right away. Before we begin, I would like to review the Safe Harbor provisions. 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. I would like to repeat the information about the presentation. If you have not downloaded it yet, you may do so through a link on the investor section of RADCOM’s website at www.radcom.com/investor-relations. If you have any trouble, send Mark an email at markr@radcom.com and he will send it to you. 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 quarter were $4.8 million, unchanged from the last quarter but lower than we had expected. At the same time as you can see in Slide 3, our gross margin for the quarter was the highest in our history, 82.5% and our margin year-to-date is 80%. This reflects our transition from hardware to software based products. As a result, the bottom line was a solid net profit for the quarter. This completes eight profitable quarters in a row, two complete years and even though the telecom market in general is challenging, we were pleased to achieve very strong bookings for this quarter, actually a record for the third quarter. As you can see on Slide 4, our operating profit on a nine month basis is up by nearly 90% compared with the first nine months of last year. So we are well positioned continuing to build the platform we need to support our next phase of growth. During the last several quarters, we have been working intensively on several tier 1 NFV opportunities, mostly in the US. Turning to Slide 5. You can see that the SDN and NFV markets are expected to have CAGR of more than 100% over the next four years with most of it coming from the established telcos. In fact, analysts are predicting that 40% of today’s CEM providers will be deploying or testing NFV technologies this year. So this is a very big market. Our virtualized MaveriQ solution is opening the door to North America and Europe which offer the largest opportunities and we are going to offer them with full force. As you know, with the goal of entering these markets rapidly and with the full power, we formed partnership with Amdocs and HP that has been taking us to the top tier service providers. The process for closing this deal is long and hard involving a marketing effort from the whole team, R&D, sales and marketing. So far we are doing extremely well, moving from stage to stage and facing less competition at each new level. As we expected, the MaveriQ is proving to be a close niche to customers’ needs. Winning any such opportunity will be a game changer for RADCOM. Financially it will take us – it will take our revenues and profits to a new level and from a competitive point of view, it would position us as the clear leader of virtualized CEM leading naturally to more tier 1 business. Obviously nothing is certain until we have orders in hand. And we have no control over timing. That you can see in Slide 6. Having created the right product and partnerships, we are positioned to take advantage of the opportunity. Netscout’s acquisition of Tektronix is also working to our benefit. In summary, as you can understand from my remarks, 2015 has been the year in which we began pursuing a very ambitious strategy for penetrating the developed markets with our NFV solution. We are pleased with our progress. With that, I will just stop and turn the call over to Uri to discuss the financial results. Uri please.

Thank you, David. Since you have the financial results beginning on Slide 7, I will just go over the highlights. To help you understand the results we'll be referring mainly to non-GAAP numbers, which exclude share based compensation. Revenues for the quarter were $4.8 million, unchanged from the second quarter but down from last year. As David said, this reflects the focus of the entire organization on our new opportunities. Nevertheless, our bookings for the quarter were at the record level. There is still a lot of potential with our existing customers. For the nine month period, revenues were $16 million, down slightly from $16.4 million in the first nine months of 2014. Turning to Slide 8. Our gross margin for the quarter has set a new record 82.5%. This is in line with the new long term target that we set last quarter which is above 80%. In fact, for the nine months period, gross margin was exactly 80%. As you can see on Slide 9, our gross R&D for the quarter was just under $1.3 million, unchanged from last year. However the net figure is nearly 40% lower for $114,000 compared with $644,000 in the third quarter of 2014. The $867,000 was a catch up grant which we are expecting to receive from the chief scientist for Q1 and Q2 as was communicated in our previous calls this year. For the nine month period, net R&D was $3 million, basically the same for the first nine months of 2014. We expect to continue receiving the R&D grants in the future as we did in the past. But we can never predict the timing. Sales and marketing for the quarter was $2.1 million, up from $1.6 million in the third quarter of 2014. This reflects the commissions paid in respect of the high level of bookings that were recorded during this quarter. For the nine month period, sales and marketing totaled $5.5 million, unchanged from 2014. On Slide 10, you will see that high gross margin plus chief scientist grants made up the most of the revenue shortfall giving us nearly $1 million in operating income on a non-GAAP basis. For the nine month period, operating profit was almost doubled its level in 2014, $2.9 million compared with $1.5 million in the first nine months of 2014. Financial expense during the quarter totaled $107,000. As you know, this item fluctuates from quarter to quarter based on currency exchange rates. For the nine months period, financial expenses have totaled $481,000, obviously impacting our net profit. This compares with just $52,000 for the first nine months of 2014. As you can see on Slide 11, net income for the quarter totaled $835,000 on a non-GAAP basis or $0.10 per basic share. This is down slightly from $872,000 or $0.11 per basic share in the third quarter of 2014. Net income for the first nine months was $2.3 million or $0.26 per basic share. This is up from $1.5 million in the first nine months of 2014. On Slide 12, we’ve given you a full non-GAAP income statement for your reference. Turning to the balance sheet. As you can see on Slide 13, our cash and cash equivalents as of the end of the quarter were $8 million, reflecting continuous strong collection and high customer satisfaction. This compares with just $4.5 million at the end of Q3 a year ago. Our inventory levels have decreased from $2.7 million at the end of 2014 to $1.7 million as of September 30. I would like to direct your attention to Slide 14 and 15. That demonstrates the improvement in our key balance sheet ratio over the past two years. I think that this shows the fundamental strengths of our company better than almost anything else we can present. Back to you, David.

Thank you, Uri. So that is for the third quarter. We are healthy, well positioned and have a fantastic pipeline of opportunities. I am proud of the entire RADCOM team and very optimistic about the company’s future. We look forward to reporting our progress in the quarters ahead. With that, we would be happy to take your questions. Operator?

[Operator Instructions] The first question is from Brian Kinstlinger of Maxim Group.

Thanks for taking my questions. I have three. The first one, you mentioned the revenues were lower than you expected but I didn’t quite hear the reason that you think they came in lower than expected, maybe you could expand on that.

Okay, what I said in my remarks is that we were more focused in the opportunities we built for the NFV solution than in the execution of existing projects and as you probably know, in our business the difference between booking and revenues is basically when we are getting the acceptance from customers. So our decision was for this quarter and basically it was also quarter before to give more priority to the new opportunities than a sharp execution of existing projects.

So when you say not sharp execution, does that mean the customers weren’t happy and were there any ramifications?

No, no, it has nothing to do with the satisfaction of the customer. You can – when you are getting a deal you need to deliver software and do specific adjustment. It can take a few months, it can take more than that, so you can sometimes – that makes things happening faster than you planned before. And basically I can say that majority of our customers are very happy and satisfied with our solution.

And at least last for a couple more quarters or is that process complete where it won’t impact the top line as much any more?

I believe the message behind our remarks is that we are now full steam ahead with the opportunities in tier 1 in the developed markets, mainly US and Europe and that will have some kind of alternative of course.

You mentioned this year as a big year for telcos evaluating and testing NFVs. Can you quantify the pipeline, maybe how many opportunities do you expect to compete for in the next 12 months and maybe how many of those might have decisions in the next 12 months, so investors can sort of gauge the opportunity in the near term?

We are [ph] not to get into those specific details but we see more and more operators getting into the NFV and not only the NFV, also building their strategy about how to monitor their network with a solution and with technology like we can provide.

I guess maybe that’s full steam ahead with the opportunities and it’s a big year for telcos evaluating NFVs, how soon you think it might be before we view it in your bookings results or revenues, for that matter?

I don’t have control on customer decision. But I can say that part of the potential customer take this direction as the virtuous direction, and we believe there will be decision in the market soon.

The next question is from Amit Dayal of Rodman & Renshaw.

In regards to the revenue mix in the third quarter given what the margins were, is it now all software sales, are we done with all the legacy hardware related products?

Hi Amit, as you can see the gross margin, the 80% gross margins reflect really that the majority of the change that we are doing, moving from hardware to software is already behind us. But still we need to support some customer that bought a solution a few years ago with the legacy Omni-Q solution we had, and my expectation is that we still have some hardware deliveries but it’s become a less and less meaningful in our business.

Just from a modeling point of view, I mean should we be targeting around 80% plus margins going forward in a more consistent basis?

Yes. Amit, I will maybe remind as to – we set a long term target – we announced a long term target, last quarter we announced a long term target of 80%, meaning that for the long term we expect 80% to be a reasonable number. A year before we put a target of 75% and we are very happy with the progress even better than what we expected resolving the gross margin. So I believe it will be reasonable to put 80% if you want to be a little bit more conservative because there is a fluctuation in the market, then you can reduce it a little bit for the short term.

And just my final question on some of the comments regarding the weakness in the third quarter driven by I guess resource requirements. I mean we have a pretty strong balance sheet, now almost $8 million in cash. Are you thinking of maybe adding talent, required people into those positions or you can continue pursuing these game changing tier 1 type opportunity while not sacrificing your near term opportunities that you’ve already been involved in?

We took a very aggressive approach in term of our strategy to penetrate the US market with NFV solution, and as we are gaining more confidence every quarter, every month basically more and more confidence, we are planning to use, of course, the balance sheet and the strength of the company and to increase the execution power, mainly hire more people and we are in a process of increasing the headcount in the company since we are more optimistic now than we used to be. Still we are under a conservative methodology of management with the situation. I think I would like to add that I think that you know, the alternative cost of our efforts reflected in the revenue line is very reasonable if you compare it to the potential we can generate.

The next question is from Josh Goldberg of G2 Investment Partners.

I have two questions. Before talking about some of the newer opportunities, I guess, for the first time you said on the call that you feel that the acquisition by Tektronix -- Netscout’s acquisition of Tektronix is proving to be a positive for you. Can you discuss little bit more what you are seeing in the market, is it because there is a chance for you to become a second vendor, or there’s some revenue slippage and if you can size how big that could be for you as you progress with your NFV solutions, outside of the big projects, just typical business around the world is the acquisition of Tektronix by Netscout enabling you to get in as a second source for some more deals? And I have a follow up.

Hi Josh. First of all, I think you are right and the acquisition really generates opportunity for players to become the second source and – place for a second source, since before that the market was dominated by Tektronix around 30% and Netscout something like 15 there, or maybe little bit more percent. But I think it’s more than that. I think this transition in a period that’s big make a big list of operators and their existing customer unhappy, and we feel this is opportunity for other players, for the smaller players, including RADCOM to show their technology and to address the need of the customers of Tektronix – of Netscout, then Tektronix and to find more opportunities and this is one of the reasons that we gained a strong pipeline today.

It seems that Josh Goldberg has disconnected from the call. And we will continue to the second round of questions. [Operator Instructions] The next question is from George Marima.

Is your balance sheet sufficient now for tier 1 opportunities?

First of all, we feel that – good morning – we feel that we have a very strong balance sheet and in addition to that, as I mentioned, we are working with partners, very strong partners, I mentioned them, Amdocs, HP, and in any scenario of NFV tier 1 winning, they are going with us. They are not just a channel, they will do the support and we are working together in these opportunities.

And can you give us any enlightenment as to why Zohar has left his position as Chairman?

I think we are releasing the press release and I will not answer that.

The next question is Josh Goldberg from G2 Investment Partners.

Hi sorry, I lost you for a second. I guess my second question was on your comments, you specifically said that you feel more confident now and each passing new test continues, you are feeling more confident about your ability to really penetrate some of these tier 1s and I guess still obviously you never know the timing and you certainly don’t know the size of it but just to kind of bring it to a example that’s going on in America today, it’s a World Series this week in New York, do you win some tier 1 deals and it’s a $3 million or $4 million contract, those aren’t World Series deals. From what you are seeing, do you believe that you are in position to win significant deals, breakthrough deals, these deals that are as strong or bigger than you’ve ever seen before?

I prefer not to get into the exact numbers but when we won a deal in Asia Pacific or we announced a deal of around $13 million or $14 million with the MaveriQ two years ago, this deal was the size of a tier 1 in Asia Pacific and I think we all understand that in the US market as well as Europe market, there are very big tier 1 operators, very strong tier 1 operators with a wide network and a high capacity. So in general the numbers in the market, in this market segment, US and Europe is higher, much higher than the numbers we used to have in other territories.

And the level of confidence that you have that after each test that you feel like you are gaining confidence. Can you just give us some sense of why that is?

We are – basically the potential customers, they are testing our solution in the last year, so we are getting – in each of the evaluation we are doing, in each of the test we are getting a very positive feedback from the customers. And by that we are gaining more motivation and we are gaining more feedback that we took the right decision, and it’s helped us to be more optimistic. It’s very hard to measure that, that is very good, and all indications so far are that this is a sound approach that we will succeed in the market, and time will tell.

The next question is from [Chris Sadoff with Cineview Technology Group].

Hi, thanks for taking my questions. I just have two. One of them is just to understand better the timing of a contract win to revenue recognition. You announced on October 13 a $2 million order and if you could remind me or just explain over what period of time would you expect that revenue to actually flow through the P&L?

In general what we are saying is that delivery of a project takes us between three to six months. So I think you can take this timeframe as the answer.

And my other question is a simple one. I just wanted to ask you – can you give us the quarterly cash balance comparison and explain what impacted that in terms of the balance sheet?

It’s Uri here. Basically the main effect that we have related to the cash is due to FX rates, mainly to Brazil, the FX there went – the real became weaker versus the US dollar and it affected our US dollar amount obviously, it’s not that material effect if you compare Q2 number to Q3 number.

Was the Q2 ending number 9.9 million?

Yes.

So the $2 million sequential differential is currency related or is it more receivables?

Half of it is due to FX.

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

Josh actually asked my questions.

The next question is a follow up from George Marima.

Hi David. I wanted to ask – you said in your prepared remarks that the quarter had record bookings and I only remember hearing about $2 million announced during the quarter. I am assuming that means that you’ve had several deals that were not announced, is that correct and were any of these deals a tier 1 deals somewhere in the world?

We choose to announce deals that – we find some uniqueness about them, not to every deal that – and every deal that we are getting is something we announce. So your assumption is right.

Can you give us any more color on the bookings?

Yes, the bookings were very high, we confirmed our booking in – Q3 bookings 15 years back and we find that this is the highest number. It was a combination of a few big – basically two relatively big deals and the other is small one.

And are these going to be delivered in 2015 or 2016, these two big deals?

Again the delivery is normally around three to six months. We can succeed sometimes deliver it earlier than that or there can be some delays. It’s very hard to tell.

And back last quarter, a few months ago you’d mentioned you were working on a Russian deal that sort of slipped from Q1 – or I am sorry – Q2 it slipped and you were hoping that it would come back alive in Q3 or Q4. Did you get any official movement on that or what’s the status of that contract, it’s about $1 million or $1.4 million range, I think you said?

Yes, this deal was software only, little bit more than $1 million deal, and we didn’t get it till now, it’s still in our pipeline.

Is it still a live contract or you know –

The deal was out, basically is to retard [ph] the competition, we are waiting for budget confirmation that may come and may not come. We were disappointed in Q2 of not getting it and we will wait till the customer will be mature enough and strong enough to do the investment.

The next question is a follow up from Brian Kinstlinger.

I just wanted to follow up on the bookings questions. Can you provide what total bookings were? I mean it doesn’t give us an insight to any customers.

We don’t give this figure. However it was very strong in the quarter. I think that’s good enough.

You mentioned two large ones, did you press release either of those large ones?

I think I answered it already. I mean we are not press releasing everything. But the numbers we’re satisfied, we were happy with that, especially when it came in Q3, normally the big improvement in booking is in the telcos environment in Q4. So we are happy with the results of the bookings in Q3, especially when we are under a lot of pressure working very hard around virtualized solution and the penetration to the US and Europe market.

The next question is a follow up from Josh Goldberg.

I guess, David, if you can just – and obviously I realize that this has been 12 months or more of effort, so but I just want you for the investors on the phone to understand, when you put in your press release, our progress with top tier NFV markets and discussion moving forward with tier 1 service providers in the US, without going into any more details, just help us understand why are you so excited that these discussions have continued into these transformative opportunities, however, you can help investors understand a little bit more about obviously it takes a long time but the lead, and the sell side it was very long and everything else, but it does seem like you are quite optimistic today on the future of the company and these discussions seem to give you that type of confidence, if you can just talk a little bit more about that, however, you can?

Basically it’s a combination of two dimensions. The first dimension is that – or the reason for our excitement is a combination of those two dimensions. The first dimension is the fact that as we expected the NFV market has really taken momentum, I mean really the operators and you can read – there is a lot of material on the web and operators are speaking about that, they are taking it to the next level, they are doing the investment in the virtualization for two reasons. The first reason is that it sends them a CapEx, and the second reason is going to send them a meaningful OpEx. Investment in service assurance solution, customer experience management solution and analytics like we can provide should be and is a part of the solution they need in order to finish this transition to NFV. So the first dimension and the first reason for our optimism is the fact that we see that we put our finger in the right direction and this is the direction that the big telcos are taking and the rest will follow them. This is one thing. The other thing is that we gained experience in the last nine months, maybe a little bit more than that, from a very good feedback that we are getting from a customer and very serious customers and when you are getting this kind of feedback and they are telling you that you have a good technology and it fits the need, and they are very happy, then you gain your confidence and optimism.

And is it fair to say that this optimism and confidence sounds like it’s not just one customer?

We are working on the NFV in the US and Europe and of course each of the customer has its own roadmap and timetable but it’s more than one customer.

And just I guess, the last question from me would just be, and we’ve been shareholders and believers in the company for a long time. As much as the near term weakness is disappointing some investors, I think you are making the right decision in terms of going after these bigger opportunities and that they will be game changers and they will change the company’s growth and exposure to a level that I think is well worth the effort that you are putting in. And I guess all of us as investors just need to have some patience as we see how the next few months play out.

Thank you Josh for the confidence.

Next question from Amit Dayal, follow up.

Thank you. Sorry I have been juggling a few calls. I know you have answered some questions around the bookings. Can you give us what the previous high for the bookings was?

Amit, unfortunately, I don’t have it in front of me. But in any case we prefer not to discuss the exact number. We just say that we – maybe you were not in the call during my answer about it but it’s 15 years back and in Q3 this is a record for the company and it gives us a good confidence. End of Q&A

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

Yes, thank you very much for joining the call and confidence. And thank you, Noga.

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