RADCOM Ltd. (RDCM) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited First Quarter 2016 Results Conference Call. All participants are 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, May 10, 2016. I would now like to hand over the call to Ms. Noga Fisher. Ms. Fisher, would you like to begin?

Thank you, Nova, and thank you all for joining us. With me today are RADCOM's CEO, Yaron Ravkaie; 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. 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 Investors section of RADCOM’s website at www.radcom.com/investor-relations. If you have any trouble, please send Mark Rolston an email at markr@radcom.com and he will send it to you right away. Before we begin, I would like to review the Safe Harbor provision. Certain statements made on this conference call will use words such as estimate, project, intend, expect, believe, may, might, predict, potential, anticipate, plan or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. For example, statements about the Company’s growth projection, backlog, visibility into future periods and future revenues transfer right into the NFV market and it’s expansion, successful implementation of RADCOM strategy, new wins from potential top tier NFV players, increased levels of R&D and other expenses and recede of R&D grants all constitute forward-looking statements. Forward-looking statements in the conference call involve a number of known and unknown risks and uncertainties, that could cause the actual results, performance or achievements of the Company to be materially different from those that may be expressed or implied by such statements, including, among others, changes in general economic and business conditions and specifically, decline in demand for the Company’s products, inability to timely develop and introduce new technologies, products and applications, and loss of market share and pressure on prices resulting from competition. For additional information regarding these and other risks and uncertainties associated with the Company’s business, reference is made to the Company’s reports filed from time to time with the U.S. Securities and Exchange Commission. The Company does not undertake to revise or update any forward-looking statements for any reason. 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 and appear on RADCOM's website. 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. Now, I’ll turn the call over to Yaron. Go ahead, please.

Thank you, Noga. Thank you all for joining us today. I hope you have our presentation in front of you and I’ll begin with Slide Four. As you can see our results for the first quarter were very good, an indication of what we believe will be the new normal for the company as we’ve entered into a new era of growth. I am pleased to report that we are on track with our plans. We’re focused on tight delivery of all our customer commitments and we are leveraging our first-mover advantage within the NFV space. Our revenues for the quarter were $6.5 million. And now given our strong record breaking backlog, we have high visibility for continued growth through 2016 for just in $28 million to $29.5 million for the year. This represents over 50% growth compared with 2015. In addition, the fact that we are now positioned is the leader of NFV Service Assurance, the status we achieved when we won the NFV markets firs mega service assurance deployment has opened a whole new league of opportunities with top tier operators. We are now in discussions with several of them. Let me share with you the key elements of our strategy and our progress against future dates. Our goal is to scale up the company to support this year’s growth and the new types of deals that we are targeting now, engaging top tier players that are transforming their networks and need new comprehensive service assurance tax. We’ll be investing in the infrastructure we need for sales, presales and technical trials as well as delivery. The company needs to be able to scale to support a handful of top tier client and that’s our multi-year plan. Obviously, we are fully focused on execution, making sure that we execute smoothly on this first mega NFV deployment and the other views in our backlog and on every new deals that follows. We’re very pleased with our performance so far and this will continue to be our major focus throughout 2016. The next focus area is sales, engaging additional top tier communication service providers. We are currently in discussions with several potential new customers as the word gets out regarding the unique capabilities of our product offering. Deals of this scope take time and the company is focused on sharing our top leadership helping our customers transform their networks. The next step is marketing, strengthening our positioning within the NFV ecosystem. We continue to collaborate and partner with some key NFV vendors and maturing joint opportunities. And obviously a major focus will always continue to be our product development. As we are now deepening into a transformational NFV project, we’ve moved well beyond the theoretical and have become the industry’s first mover. We’re working closely with the customer to meet their real needs moving from the theoretical lab implantation into a complex transformational deployment. This entire NFV space is new cutting-edge and developing constantly. Our R&D is creative and agile providing a very innovative and scalable product to our client. Over the quarter, we rolled out a new release with many additional new and innovative NFV capabilities including new complementary products that we will be unavailing later this year. We believe that the gap between us and our competitors is wide and we continue to expand it. In summary, we are well into a major growth year for RADCOM. As the first movers in our space, our product is attracting lots of interest and were heads down innovating working and implementing. We’ve now boring days in the company and we are very excited by our prospects. With that, I’ll stop and turn the call over to Uri to discuss the financial results. Uri, please.

Thank you, Yaron. Since you have the financial results beginning on Slide Six, we’ll just go over the highlights. Trying to understand the result, I’ll be referring mainly to non-GAAP numbers, which exclude share based compensation. In the previous quarters that we offer for comparison non-GAAP numbers also exclude inventory and commission write-off. Revenues for the quarter were $6.5 million more than doubled the level in the fourth quarter and up 3% from the first quarter of 2015. We are projecting a new consistency of our revenue. In 2015, we posted $6.4 million revenue for the first quarter, but then dropped down for the next three quarter. Today our situation is different. We have visibility for consistency strong revenues at least for the end of 2016. And in new Tier 1 customers that we secure with visibility and long term potential. So we feel that the company has moved to a new level, even though the quarter’s revenues are similar on the year-over-year basis. Turning to Slide Seven. You can see that our gross margin for the quarter was 74.4% compared with 82.6% for the first quarter last year and 64.5% for the fourth quarter. Our gross margin will continue to fluctuate depending upon specific mix of each quarter’s project revenues. As you can see on Slide Eight, our gross R&D for the quarter on a non-GAAP basis was $1.7 million, up 9% from last quarter and up to a 13% from Q1 2015. This reflects the beginning of the ramp up in our R&D capabilities as Yaron discussed before. We will be hiring more R&D engineers and making significant investment to continue to increase our competitive edge of the NFV technology expert in our space. In line with our expectation, we have not yet received an approval from the office of the chief scientist during the first quarter. In general, we do expect to continue receiving the R&D grants but cannot predict the timing. Sales and marketing expenses for the quarter totaled $1.5 million, down from $2 million last quarter and from the first quarter of 2015. This reflects the timing of commission and not reduction in our sales force. And we expect it to increase in the future as we build up the sales and marketing organization. We posted a $1.1 million operating profit for the quarter compared to $1.6 million loss for the fourth quarter of 2015. For the first quarter of 2015, operating profit was $1.3 million. We posted $289,000 in financial income for the quarter, primarily due to the Brazilian real. As you can see on Slide Nine, net income for the quarter on a non-GAAP basis was $1.3 million or $0.14 per diluted share. This is up by 63% compared with the first quarter of last year. As you can see that we are very healthy and moving in the right direction. Turning to the balance sheet. As you see on Slide 10, our cash and cash equivalents as of the end of the quarter was $25.5 million, almost triple the level in the end of 2015. This reflects a large prepayment made soon right after signing the top Tire 1 deal together with continuing strong collection. Back to you, Yaron.

Thank you, Uri. So that’s it for the first quarter. We feel confident regarding the future and are focused on leveraging our NFV leadership to build the company to the next level. With that, we would be happy to take your questions. Operator?

Thank you. [Operator Instructions] The first question is from Amit Dayal of Rodman & Renshaw. Please go ahead.

Thank you. Congratulation guys on a really strong quarter, it looks like you know the progress with the North American efforts is starting to come through. You know just wanted to get a sense of what the, say the North American or the U.S. revenues are relative to you know the non-U.S. and non-North American revenues?

In general for the year, we’d expect the North American revenues to be around maybe above 50% of our revenue - 50%-55% of our revenue, something like that. It’s not accurately predicted but that’s pretty much what will be.

So who are we splitting resources between say your legacy revenues that are sort of non-U.S. and now with all the traction in the U.S. like you mentioned adding more people et cetera over here, but will the focus say for 2017 sort of be in the U.S. markets or you know to going after the larger you know Tier 1 type customers or will you continue to also pursue these costumers abroad?

We’re going to give up on any customer. If you look it at from that perspective, but the priority for the company will be to focus the company and the bigger top tier deals. So not everything will be Tier 1 but there will be lot of focus on top tier. I expect to see, now it can take more than the year, but expect to see let’s say over the next 18 to 24 months increase in North America and Western Europe as I am expecting these regions to generate more like top tier transformational project in us winning them.

Got it, got it. And on the gross margin side, you know the low 70s, is this what we should sort of model for at least the next 12 months?

I think long term beyond the 12 months; we’re aiming the company for the higher 70s even to the level of 80. But in the next 12 months, we’re going to experience fluctuations primarily because you know some of the work is project based and accounting practices of what you consider R&D, what you consider cost of sales and things like that. And some of the work, though we’re 100% software, we still package some of the work to our clients as similar to equipment base. So we do sell them like standard hardware, it’s part of the deal. So that changes the accounting practices. So you might be able to see quarters like, this quarter you might be able to see several percentage higher and maybe lower, so it will fluctuation. It will be above 70 I presume but it will fluctuate there.

Okay. Just one last question. In terms of the deployment so far in the North American market, how is everything going and are you satisfied with the progress being made, is the customer happy?

I would say very satisfied. It’s going very well the strong relationship and we are also exploring expansion of the relationship, so more to come also.

Okay, that’s great. Thank you so much.

The next question is from Marcel Herbst of Herbst Capital Management. Please go ahead.

Good morning and thanks for taking my question. I got some questions regarding your non-NFV side of your business. On the last call, you spoke about having migrate almost all of your top accounts to MaveriQ. To get a better understating of the remaining potential within these top accounts, how should we think of in terms penetration level?

What do you mean like penetration levels into what?

Penetration level into these accounts, I would think that you land and expand your deals and you had signed up six or seven large customers with your initial MaveriQ deployment where most of revenue came from and I am wondering since it was mentioned that this was that you have penetrated all of your larger accounts now, how penetrated have you into these accounts?

What we’re expecting like some sort of a steady revenue stream from our top tier accounts. You know they differ in size, so a big account will generate more in carriers and smaller will generate less. And we see it over the course of also the last couple of years. So our business is you know make sure that we satisfy our customers and you can consider it like repeat sales in some cases and in some cases it’s longer term contracts that we have. And I am pretty happy with where it’s at.

Okay, good. Now obviously we do hear about like slower LTE rollouts in Europe and in some various developing countries, would it be fair to assume like year-over-year decline in your non-NFV core business?

I think I look at it different here; I am not sure like we would analyze a decline. I think there is certain - the main reason is because there is overlap between the various like markets but it’s more than markets, it’s the drivers that dive business. So what drives this business - what drives business is basically the need for our communication service provider. I do rollout service assurance step for part of their network or do something transformational for their entire network. Those drivers we’ve talked this call and in the previous call about NFVs being a major drive, but there is also additional drive. So as data explode, as they rollout like something like voice-over-Wi-Fi we see now a demand for that. They rollout voice-over-LTE which is a service that’s complicated to monitor. All those generates a need to expand on like a probe-based service assurance step. In some cases, it overlaps, so a carrier might do rollout voice-over-LTE and roll it out like in NFV mode. And we see now the market in a point where these NFV has started to be mature, so I expect to see more and more of those.

I see, that’s helpful, thank you. And in what ballpark was your book-to-bill in the quarter? Hello? Hello?

Sorry, we were tying around. I don’t have in the hand here so, we didn’t give it before, so we are not - we are going to skip it, sorry.

Okay. Can you at least say if it was above or below one?

We’re not going to go into it.

Oh, yeah, okay. Can you give some qualitative color on how your bookings were in the first quarter? Was it to up expectations, was is a tougher quarter, was - any color you can add here?

I would say we’re on track with the booking target for the year. Some of these deals and expansion that we have with the existing customer, you know they get a life of their own but we’re in a good progress to deliver on the guidance that we have. We have good visibility, we are executing against it.

Okay. If I may one more question. In your 20-F, one of the risk factors you listed was related to so called operation support system intro operability initiative. I don’t really know what it is but has this matured and become more real over the past year or I mean how worried are you about this, is this more of boiler by the statement or is this something that you actually look at?

I would categorize it is the boiler statement.

Alright, thanks a lot, that’s it from me.

[Operator Instructions] The next question is from George Marima. Please go ahead.

Hi, good morning, Yaron. Could you give us some commentary on the details of the pipeline, you mentioned you have several, you are in discussion with Tier 1s and NFV, can you just speak about what level of engagement we’re in and timelines and are we in trials, kind of where are we in all these?

I’ll take half a step back. The deal that we won, there was the first mega deal in the industry, okay and with a very aggressive operator. What’s happening now is that additional communication serviced providers are basically maturing and hardening their strategy and some of them are already starting to do some smaller scale very initial NFV deployments like a corner of the network things like that. We’ve engaged with the ones that are not the most aggressive one which we’ve contracted - that is contracted up, but now with one circle around that, and it’s the level of now going deep into their plans and things like that and I expect with some of them to go into trials in the coming months to come. We are already planning trials with some of them. If you are trying to predict - the question of what I think the sale cycle is it’s not, there are no short sale cycles in technology and network. So and this is new - NFV is a new space to everyone, so everybody is like spending a lot of energy on it. So with the previous that the deal we wanted, took us nine months. I don’t see some indication that it’s going to different, could be a tab shorter a tab longer but it’s pretty much some sort of feeling for the or color for the sales cycle.

And in what geography are these opportunities, are they most in North America based or they also in Europe?

Combination of primarily North America and Western Europe with some in APAC.

Okay, and then touching more on your sort fall of non-NFV business which I know is kind of hard to do now but is - so your expectations is that your sort of LTE non-NFV business is stable, is that - I understand that correctly.

There is - it’s back to - there is - that these things are going to cross, it’s not, it’s going to very hard to categorize an opportunity as in NFV or like in NFV voice-over-LTE opportunity. So for example and I’ll explain. CSPs, what are they looking at now. When they go and maybe in the - it’s like two years ago they would buy an equipment to provide service assurance and a probe-based assurance solution. That was how the markets look like. They after companies not similar to us but that are equipment based and buy solutions there. Now what is happening, they are going to change and there are some like the client that we won are changing their selection criteria. They need software, a fully software solution and they needed both for if they need to monitor like something new like voice-over-LTE, I am using it as an example. And if they starting to deploy NFV, they need it also for their NFV deployment and that’s going to cross because some of the clients when they deploy voice-over-LTE, they are going to do it like an NFV mode, some will not do within NFV mode but they will chose a stack that is NFV ridge. So we are seeing, I call it a hybrid. They were seeing this hybrid type of solutions now the last quarter being the discussion topic with a lot of these carries. So I am expecting you know the business to grow. I am expecting traditional drives like data explosion by the rollout of voice-over-LTE and things like that to drive the business, but I am expecting the carriers to make decisions and buy NFV ready solutions. And that’s what positions us in a very good place because that’s exactly what we are. You need to be a 1000% fully virtualized and fully software in order to satisfy everything that I mentioned.

Okay. And then one more question. On the product, you understand that you are doing the real work deployment and when you are talking with these various providers on new NFV projects, what are you competing against, are there other people that are ready to deploy, what are they, what other NFV products are ready to deploy today that you are competing against or is all theoretical stuff?

So we’re in the probe-based service assurance space, that’s our market. When you look at it in NFV, it’s called v-probe, virtual probe based with assurance. We have competitors in the market but to our best understanding and everything that I am hearing from the CSPs and say they enrolled out an NFV product, some are saying that they have - they don’t have real world implementation on it. Some seem to be still in the hardware area and you cannot monitory an NFV network with the equipment, that’s why we believe they were the first mover and we were widening the gap with our competition. And this is our time now to capitalize the market and that’s why we’re getting a lot of interest in the last quarter to really understand that. We haven’t been like heavy on marketing and getting out there and putting announcements, so we’re still getting a lot of increase in engagements and demand. It’s a small industry, so the industry knows how to pass it around.

Is the product able to be used in any other uses besides service providers, can it used in security for example?

Not the release that we have today but we have put security and cyber as a future use case for us. There are use cases by the way around cyber and security in a service provider that we are starting to get demand for and we’ve done some expunges for the product and we are planning some expunges for the product to accommodate for that.

Now does that create a different addressable market or is that just part of - are you consider that part of NFV, or is it adjacent market opportunities?

No, I would say this stage it is NFV service provider, so we are not going at this stage, we are going after another market. I think part of our strategy is actually to be very focused on the market that we’re adding us to spread ourselves now in another market.

Understood and thank you.

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

Hi everyone. Thanks for the call. I guess if you could talk a little bit about two different things, one is you’ve been now for a quarter, obviously you keep driving which I think is in that so better visibility on what you are thinking and I think that that’s a very healthy development. Number one, what kind of went into the guidance in terms of your pipeline, your bookings, you know what kind of confidence you have that you can be able to attain that level? That’s first one and I have a follow-up.

Okay, so first of all we have a very detailed operating plan for the year and we heavily planned for it and we went and derived the guidance out of that plans not something but we invested of course. I would say that we have above 80% of secured with contracts. So we feel pretty confident about it and it’s just Q1.

Okay. It sounds like you probably feel a little more confidence today than even when you join the company a few months ago, is that fair to say as well?

First of all it’s fair to say I am comfortable - I would say I am comfortable in a couple of angles. One, this mega deployment and I was asked that is going well. And it’s not tribute you know we spend many time on this call but we spend most of the energy of the company and securing it. It’s again they were an engineering company and having the strong product with a strong implementation and happy customers, that’s the business. And on the other side, starting to see the demand you know when you are in mover and you moved first in the industry then you think okay when I going to start to see the demand and I am starting to see the demand now for what we are doing with this mega deployment in other ones. I expect the coming quarters, this is increase. So the combination is giving me strong confident level. And I would say the third Josh, is that I really believe this were widening the gap with our competitors. It’s a highly competitive market. I think you guys or everybody on the call probably understand we’re not the biggest market share in the market but we’ll be the aggressive ones that take market share, that’s where we are positioning ourselves and that’s where we are aiming and we’ve taken already a market share in the begging of the year with this mega win. And I am starting to see it come together, that’s basically what I am saying.

I guess another question I have is regards of the bookings in the quarter, I mean it’s a first quarter, usually the first quarter is soft in general in spending, but it sounds like your opportunities and the doors that have been opened to you in the first four or five months of year has definitely been a passed surprise. Could you just talk a little bit about you know it sounds like usually there is multiple opportunities. How many you think are really started to develop now in the last few months and how far along you think some of that gone even you know people start calling you directly after winning this mega deal, is there some you know - is there some more increased interest in NFV that you haven’t seen before. It just seems from our side you know the big companies the Cisco and other that are seeing a slowdown in their business because more and more the carriers are thinking about NFV and virtualizing their networks which really places your strength.

So I would say, you know I am trying to quantify that just from the beginning of the year, we are engaged with five new logos that we have we didn’t do business with and I would even say that I am not sure we would have attracted in the past, okay. And the door gets open to us very fast and everybody wants to learn and we’re positioned as like a leader and we are helping that mature their NFV implementation. And one of the main reasons for it is everybody is interested in service assurance because when you rollout complicated NFV network and even if you are just planning to roll it out in the developed world, they all understand that they can’t rollout all these new moving parts without putting service assurance that can something to be their eyes in their network. So we are seeing all of that come together. Now how it’s going to translate into dollars that’s going to be the next step. But there is always the first one the big mega move that already happened and usually what happens is now several will follow and we’re in discussions with the right ones.

In terms of ‘16 and even ‘17, you know when you first when you came on board during the year you said you thought that there was enough growth, yourself comfortable that ‘16 will be a growth year and ‘17 will be a growth year, quite you are still confident that those two things will play out?

Yes, we have - I think we have significant visibility also into 2017 with our backlog. So we’re going to be healthy good company go again there. And I think would capitalizing on an additional projects that we’re starting to get the line of side into will be able to generate growth which will be step function for the numbers that I predicted that you know we forecasted on this call. So I think everybody needs to envision us as - I like to explain as hunting elephant, okay, it’s not - we are not fishing. So when we hunting elephants, each elephants will be a big step up function for us.

Okay, how could you feel about just the pace of your business with your biggest carries, it sounds like you are seeing, obviously they are happy with your product and do you think there is a change for some follow-on orders to the year?

We’ve built over the course of the quarter and I would say it’s been built upon nine months that we spend there in the trial intimacy with this carrier. This intimacy is something that I’ve built in the past with top tier carriers and some of you familiar with my background, as this intimacy continues to mature and it’s in a very good place now. I am pretty confident that will expand the business that which is already big. And it’s - the expansion is only built on the fact that they are happy with what they are seeing. They are happy with the deliverables, they are happy with the flexibility that we are showing them with the agility, with the partnership, so it’s a green light now.

Okay, great, thanks so much.

The next question is from Mike Arnold [ph]. Please go ahead.

Hi, Yaron. Thanks for talking my question. I had a quick question of the shelf that you guys solved in March, you know sitting here today we’ve got I guess $25.5 million in cash in the bank, is that something - is the shelf something just in case you know we are able to close a couple deals that we can support a few more anchored customers. What you guys thinking about that?

You are on the right direction. So we file the shelf to provide us with flexibility to access the capital markets. During the regular course of business of course we are going to all the time as system market conditions, the interest in the company and things like that. And the end results it’s going to let us of course raise capita when we needed, if we needed. And the end result is that we need a very strong balance sheet in order to support us and envision with two, three, four additional mega customers. And in some cases, you don’t know if you’ll get the money in advance, you don’t’ know exactly the conditions and you know there are going to expect the very healthy and strong balance sheet. So I think you are on the right path of exactly understanding why we did it.

Okay, great. Hopefully lease more business, I appreciate the time. Thank you.

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

Hi, good morning, everyone. Congratulations on the quarter and the guidance. Just a quick question, you’ve referenced a couple of times it being a mega deal and I know when you announced the contract, you announced $80 million initial order which was part of significantly larger deal. I was wondering if you can give any sort of indication what that total contract of which the 80 was just the initial order?

I think we gave the color before, we didn’t want to give an accurate number and we’re still not want to give one. But it’s say you know several times bigger than the 80 million.

Okay, so it’s a multiple of the 80 million.

Okay.

Okay, thank you.

There are no more questions at this time. Mr. Ravkaie, would you like to make a concluding statement?

Thank you for joining the call and we’ll see you next quarter.

Yeah, sorry about that. Thanks everyone.