RADCOM Ltd. (RDCM) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to RADCOM Ltd. First Quarter 2018 Results Conference Call. All participants are at currently 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, and will be available for reply on the company’s website at www.radcom.com from May 23, 2018. On the call today is Yaron Ravkaie, RADCOM’s CEO; and Ran Vered, RADCOM’s CFO. By now, we assume you have all seen the earnings press release, which was issued earlier today. It is available on all the major financial news feeds. Please note that the 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/investors-relations. If you have any trouble, please send Mark Rolston an e-mail at markr@radcom.com and he will send it to you right away. Before we begin, I’d like to review the Safe Harbor provision. Forward-looking statements in the conference call involve a number of risks and uncertainties, including but not limited to the Company's statement about its 2017 revenue and other performance guidance such as gross margin, levels of growth of revenues in the second half of 2018 and levels of expenses and investment in infrastructure, momentum, efficiency of capital resources and plans to expand the company’s workforce, receipt of additional grants, strategy, launching new products and potential sales of such products, size of pipeline, success of trials and translation there-off into actual sales, market share and market share growth, expansion into new countries and extension of its leadership position, additional transition to NFV. AT&T’s continuance as an important customer and key reference and its plan to virtualize its network over the long-term, favorable industry trends and their effects on the company and project sales cycles, orders engagement and expanding relationships with top-tier carriers and entering into new contracts with additional operators. The Company does not undertake to update forward-looking statements. The full Safe Harbor provisions including risks that can cause actual results to differ from those forward-looking statements are outlined in the presentation and in the Company's SEC filings. 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 stock-based compensation expenses, 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 which is available on our 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/investors-relations. If you have any trouble, send Mark an e-mail at markr@radcom.com and he will send it to you directly. Now, I'd like to turn over the call to Yaron. Please go ahead.

Thank you, operator, and thank you all for joining us today. We are very pleased with our first quarter results in which we delivered another record quarter. We executed on a number of deployments with existing customers and executed in the new major customer deployment we announced in late 2017. As we highlighted last quarter, one of the NFV pilots that we have been delivering produced a very successful result. With RADCOM being selected by a tough peer Galaxy Operator, we are currently working with this operator on schedules, projects, scope and contracts. We expect this planning phase to be finalized soon and implementation to start in the second half of the year. During the quarter, we also deployed our NFV solution in the world leading top tier operator that we announced in late 2017. We’re happy with the progress being made and continue to work with them on their NFV journey. We continue our strong relationship with AT&T, delivering cutting edge cloud native software releases for AT&T’s NFV transformation. AT&T’s innovation and its industry leadership in NFV transformation bolster our products in real life implementation knowledge and ensures our product leadership in the NFV market. AT&T has constantly highlighted the importance of NFV to their operational efficiency, in particular AT&T stated on their most recent earnings call that it exceeded its goal of virtualizing 55% of their network as of the end of 2017 and expects to have 65% virtualized by the end of 2018. We expect our long-term relationship to continue. The progress we are making in 2018 is excellent, we’re seeing significant momentum with our existing customers which we already delivered against during the quarter. We also have a healthy pipeline for the remainder of the year. Furthermore, we expect an additional Tier-1 opportunity to come to fruition in the second half of the year. In February, we attended Mobile World Congress which is a reminder as the leading event in the telecom industry. We believe it was a very successful event for RADCOM as interest by leading operators in our cloud native technology and broad portfolio of network visibility solutions including our new RADCOM network visibility solution that was launched at the event has generated lots of attention and opened up a more substantial pipeline for our market leading solutions. Our focus for the remainder of 2018 will be execution with our top tier customers together with the implementation of new opportunity wins as already mentioned. Also, we expect to engage in additional pilots that are now being scoped out and planned for with other leading top tier operators. As we continue to demonstrate our advanced technology with top tier operators in the NFV workshops and proof of concepts we see more and more operators moving forward with their NFV transformation plans, and these potential customers are eager to learn from our telco virtualization expertise and gain our insights and knowhow on integrating cloud-native assurance into their networks. In our leadership position we continue to work hard to provide operators various flavors of cloud implementations. We recently collaborated with the Red Hat to provide top tier operators a fully virtualized network visibility solution, running on a hardened Red Hat OpenStack platform. We announced this partnership just before Mobile World Congress. This collaboration enables operators that need support in setting up their cloud infrastructure to accelerate their ability to adopt our cloud-native solutions, while benefiting from Red Hat’s OpenStack proficiency. We also announced yesterday that RADCOM has been certified to run on Telefonica’s UNICA platform, enabling us to participate in Telefonica’s global NFV rollout that has started to take place. We continue to invest in our product portfolio to extend our leadership position and in February announced the general availability of RADCOM network visibility. This cloud native solution is explicitly designed to help operators gain full network visibility, while smartly managing and load balancing the virtual traffic for their NFV transformations. We expect this solution to enhance our portfolio and provide additional value to operators as they migrate their networks to NFV. Although this solution was recently -- was only recently introduced, we are seeing significant interest from our customers and receiving positive feedback regarding RADCOM network visibility. Given our strong and growing pipeline of opportunities, our deployment with top tier operators and our expected upcoming deployment by a top tier Galaxy Operator, we have scaled the company focusing on R&D and professional services. We are confident that our investment in infrastructure will continue to pay-off, allowing us to capture additional opportunities. Also, our strong balance sheet will allow us to executive on our strategy of increasing sales by leveraging our leadership in innovation around NFV and cloud-based solutions, by taking advantage of the experience gained from our current deployments and by maintaining our technical advantage over competitors by investing in our differentiated NFV and cloud-based solutions. Now moving onto to the results of the first quarter. We are very pleased with our first quarter results as you can see on Slide 5. Revenues for the quarter increased by 36% year-over-year to $10.9 million. Our GAAP net income was $322,000 million or $0.02 per share. We achieved a non-GAAP net income of nearly $1 million or $0.07 per diluted share. So, to summarize, we are very pleased with our execution during the first quarter given that RADCOM remains the go-to-NFV vendor for virtual probe-based service assurance and customer experience management. We are well positioned to maintain the momentum. With that, I'll stop and turn the call over to Ran Vered, our CFO, to discuss the financial results. Ran, please.

Thank you, Yaron. Please turn on to Slide number 6 for our financial highlights. To help you understand the results, I will be referring mainly to non-GAAP numbers, which excludes share-based compensation. Revenues for the quarter were $10.9 million, up 36% year-over-year. Our gross margin for the quarter was 73.9% on a non-GAAP basis, in line with our expectations. As a reminder, we expect gross margins to continue to fluctuate depending upon the mix of each quarter revenues. Our gross R&D for the quarter on a non-GAAP basis increased to $3.5 million from $2.4 million in the first quarter of 2017, which was in line with our ramp up plan and highlights our strategy of investing to support future growth. Additionally, we did not receive any grants from the Israel Innovation Authority during the period for R&D for the quarter was selling as the gross amount. We want to point out that in the second quarter of 2018, the Israel Innovation Authority approved an annual grant of approximately $1.7 million. We expect the gross R&D expenses in the coming two quarters to be roughly the same level or slightly higher. Sales and marketing expenses for the quarter increased to $3 million on a non-GAAP basis, up from $2.8 million in the first quarter of 2017. G&A expenses for the quarter on a non-GAAP basis totaled $799,000 compared to $724,000 in the first quarter of 2017. Operating income on a non-GAAP basis for the quarter was $707,000, compared with $193,000 for the first quarter of 2017. Net income for the quarter on a non-GAAP basis was just under $1 million or $0.07 per diluted share, compared to $284,000 or $0.02 per diluted share during the first quarter of 2017. On a GAAP basis, as you can see on slide 5, we reported net income of $322,000 or $0.02 per diluted share, compared to a net loss of $336,000 or $0.03 per diluted share during the first quarter of 2017. At the end of Q1 2018, our headcount was 219 employees. We expect some slight growth in the second quarter. Turning to balance sheet as you can see on slide 9, our cash, cash equivalents and short-term bank deposits as of the end of the quarter were $74.5 million, we believe that our strong cash balance places the company on a strong footing for addressing top-tier operator opportunities. Now turning to guidance. We started the year with good momentum and remain in position to increase market share and accelerate our technology leadership. As a result, we are reiterating our fiscal 2018 guidance range of $43 million to $47 million in revenue. This guidance also assumes ongoing traction with AT&T our new world leading top tier operator, as well as the addition of new customers from strong pipeline including the new top tier Galaxy Operator. Regarding profitability, while we don’t plan to provide specific EPS guidance similar to past deals, we plan to continue to invest in our infrastructure to support growth. As a reminder, we view and continue to manage our business on an annual basis because our quarterly results can fluctuate due to the timing of implementation milestones. That ends our prepared remarks. Yaron and I will turn the call back to the operator, so that we can take questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] First question is from Dmitry Netis of William Blair. Please go ahead.

I’d like to touch on the 3 NFV customers one-by-one if I may. So just to be clear the Galaxy Operator, you guys are talking about and once you mentioned in the last quarter. This is not Telefónica UNICA. So, I just want to be clear on that. And then if you could give us a sense of whether you’ve gotten any POs from this Galaxy Operator yet or not? That will be great. And if not, when do you expect to get it, I think you mentioned second half. But just a little bit clarity of what’s happening, what potential size of those POs maybe anything you talk about that will be great.

So first of all, we didn’t disclose the operator. So basically, respecting their privacy rules et cetera. So, we can’t comment on anything that has to do with that. And once we can disclose it, we will disclose it very clearly, so there won’t be a guessing game. It’s a top tier Galaxy Operator everybody will be impressed once we are going to disclose it. As for the actual plan and scope, we were selected by this operator, okay, for multiple projects within the Galaxy. Exactly the scope of this project and the timelines in which PO will be first and which company will be first and which of their assets we will implementing. This is exactly what we’ve been working with them in the last weeks and that’s the plan also for the coming weeks. So, once we finish that, we can add more color into how we see that impacting revenue for the year and you know we have the understanding of how it will impact next year et cetera.

The next question is from Alex Henderson of Needham & Company. Please go ahead.

Guys, good morning this is [Jim Park] on for Alex. So just looking at the competitive landscape, could you just talk about whether you’re seeing any competitors making inroads in terms of penetrating into own app and becoming a viable competitor to your virtualized product?

Hey sure. Sure, first of all, as I’ve been saying for the last several years, from everything that we understand and we say, we’re probably a couple of years ahead of the competition. This advantage is primarily led by AT&T on the fact that they are several years ahead of any other carrier in the migration of NFV working with them is making sure that our product and our roadmap and everything that we ‘ve been investing and will invest is cutting edge. It has a real-world expertise, very deep and this is very valuable to the players. Continuing that, we expand our expertise even on top of that and the product portfolio each time we had an operator and that’s true also for that operator that major operator that we added back in the second half of 2017 which we talked also now. And that from a like internal vantage point, view point when I look at what competitors are doing, they’re not announcing any big products or anything like that, they are trying to announce here and there some announcements which is exactly what I would expect to be to save 2.5 years after we’re into AT&T and major transformation. So, this is a good sign, it means that the industry is picking up, the other competitors see that they need to make a well investment. We still see that we’re years ahead of competition.

Okay, great. And so, it seems like gross margins were really strong this quarter. I know you’ve mentioned that it's primarily based on the mix of business close during the quarter. What’s the best way to think about this, at least directionally as we have moved throughout the year?

Hi, this is Ran. So, we had a very strong quarter in terms of gross margin. We do expect it to be in the range of any -- we can’t really expect the exact numbers but it really depends on the mix of the revenue but we do expect it to be in this higher percentage, anything between 70 to 75% is something that we are planning for.

Okay, great. Thank you for that. And I know you also touched upon the partnership with Red Hat during your prepared remarks. Just wondering if you can provide some additional color on this and do you expect any material revenues from this moving forward?

Sure. So Red Hat I think is a lot of you know is one of the leading, if not the leading company that works around the OpenStack which is the operating system that always cloud technology for network runs on and what they do is they take the open source version and they provide services in an [halved] version. So, carriers with their huge scale can scale easier enough and not need to be worried about bugs in the operating system and things like that, they can get also implementation support from Red Hat. That's what Red Hat does. Now by combining forces with them and they're very eager to combine forces with the industry leading companies that are at the cutting edge, what we do, we give service providers the ability to accelerate their migration to NFV and how does that work, if there is a communication service provider that has just started and they want, they understand that they need to make an investment in a service assurance because that helps them afterwards deploy all the other VNS that they need, they can work with us and with Red Hat in any commercial -- in various, I would say commercial engagement models and deploy cloud that will serve for service assurance and then afterwards concert for other network elements that they want to introduce. That will shorten their time to market of introducing these types of solutions and its sort of a hassle-free approach for them. This I think is going to yield, we see already positive momentum from this, it’s already going to yield acceleration of implementation plans which at the end of course leads to revenue and business.

We have a follow up question from Dmitry Netis of William Blair. Please go ahead.

Hi, thanks. I'll get back to my line of questioning. For some reason I was cut off, but going back to, I wanted to touch like I said on all the three NFV wins you’ve landed so far, so just back to the Galaxy Operator, I am sorry to pound that horse. When do you expect the POs, in Q2, Q3, Q4, is there any visibility when that comes, are you still not quite sure?

No. We expect it to be in the coming months, so we said second half of the year. So, some of the contracts have already been negotiated with them. It’s just ready to -- it's now focused on the implementation plans and as we close these implementation plans, they'll be turned into signed deals. Now whether it'll take one month more, two months more, one month less, I don't have that exact visibility, but we're targeting the second half of the year with also the plan to start the work this year, and then we’d know how it's going to impact the revenue.

Okay, Yaron, thank you for that. And do we know the rough size of this deployment relative to AT&T or the second North American Tier 1 that you've landed, I mean does it sit somewhere in between, is it on the high end of that, low end of that, can you give us some specifics around that?

I would say that it's bigger than the second one that we landed. It’s smaller than AT&T at that get go. It’s based on the nature of the implementation plan and I would say the third thing it has the potential and a very nice upside there and that’s already being discussed with them.

All right, very good.

So, there’s also a lot of positives in that implantation.

All right. And then maybe moving on to UNICA that was an interesting release as well. My understanding, it’s a different architecture right, you're talking about here open source MANO versus own app, which is used at North American customers. Is it a pure NFV, is it some sort of a hybrid, can you can you talk about maybe a little bit of architectural difference here and does it give you any sort of advantage being in this deployment because you could provide a hybrid approach here or a pure NFV, I mean anything to talk to this particular deployment and how it would differentiate the kind of the North American deployments that you've already won would be interesting to hear from you?

Okay. So, Telefonica is a big group that operates in Latin America and in several properties in Europe, those are the main operators. We have a long-term relationship already with Telefónica in one of the -- I think it's their bigger property in Latin America for Brazil and we work with them, already for many years. So, we’re familiar with the group and we’re familiar with Telefónica. Now on the UNICA platform, they have their own, because there is a lot of public information and there has been NFV transformation, there are big contributor Telefónica and open source called OSM. And we’ve been collaborating with them and with the OSM body already for the last couple of years, which has yielded very good results. And today, we see two standards in the industry that are open source and then we see some vendor specific activity. One of them being [on up] which we’ve talked in the past several times. And the other one is OSM, which we also talked about. Well, Telefónica is doing with UNICA, it’s like a pre-version of what they would like to see with OSM. So, it’s simplified architecture approach but it’s, one of maybe more steps toward the very highly automated approach that we do with OSM. Over the course of the, of our engagement with them, we’ve done a lot of NSV work with them, we’ve impressed them with our cloud native technology. And whoever to demonstrate for them on UNICA and as well as on OSM a lot of automation and how we can leverage all the investment that we’ve done in the last several years with our cloud native technology. So, this should yield positive results for us as we continue our engagement with Telefónica. And there is a lot of things that happen in this and as we said in the past, there is also projects that we engage with them and we’ve shown best year of how we have relationship with Telefónica projects coming out of them. We expect that relationship to continue and grow.

So, you are expecting revenue from this deployment. Even though this was just sort of vacation, who knows I supposed when that order -- when the potential order start coming in. Or do you actually have the visibility that revenue may land sometime this year from this deployment?

So, we have many projects going on with the Telefónica that are generating revenue. From this specific UNICA projects it’s little early to see. I do expect to see some revenue from it coming.

Moving on to AT&T if I may. First of all, how much of revenue was realized in Q1 from AT&T. And then if you could also Ran, discuss maybe that second tier 1 that you landed. Was there any revenue in Q1 as well from the second tier 1 and if so how much?

So, from AT&T we generated this quarter roughly 20% of our revenue and from this [Technical Difficulty] in Q4 ’17. We actually been able to materialize roughly [Technical Difficulty] from revenue.

How much you operating up at the moment? I’m sorry, I didn’t catch it.

So, from AT&T, it was 20%. From the, other [indiscernible] 37% this quarter. $4 million.

And then as you think about AT&T contract sort of coming to the end of this year. What is going rate that you have high confidence at this point that you will see out of this customer come 2019 timeframe and beyond. I mean maybe the best way to ask, what’s the worst-case scenario that you can land here on an ongoing basis from AT&T once the contract expires?

You know long-term modeling, we model I would say double-digit revenue from AT&T. Where it lands exactly is yet to be seen and I how we work with them on the roadmap say for the coming years. We have already some of the revenues committed beyond the maintenance revenue and things like that which is not small and it's also an active, a very active I would say customer who did beyond the maintenance revenue.

Okay. And then Ran you mentioned that, that second product that you launched at Mobile World Congress, that’s already been deployed at AT&T and you know there has been nice traction there. Have you been able to win or land any POCs with any other customers on that second product I would assume that will be a nice source of up sell for you going forward?

Yeah, absolutely. So, when we mentioned in the prepared remarks that was scoping out as we speak additional proof of concepts we’re able to secure several proof of concepts that are focused on that product. Some of it is in addition to the full product portfolio. So, we have very good momentum and we’re going to see this product participate in trials.

Okay, great. And then last question if I may be getting back to that second Tier-1 which is, I guess your third or fourth if you can count Telephonic in there as well. So, with that 37% kind of contribution in Q1, is there more to come from the original PO that you would need to account for in the P&L you know maybe in Q2, Q3 timeframe or have you pretty much realized that first purchase order and if so are there any expansion opportunities there or additional POs that you’re expecting will have a good visibility for?

Yeah, talking about the contract that we landed last year?

Yes correct, the second Tier-1.

So, we’re working with them on several active things, the contract is built in a way that there are expansion opportunities for this year and next year and there are also things beyond that. So, we plan to realize some additional revenue from that and it's probably going to happen in the second half of the year. Did you catch me? And what was the second part of the question?

Well the first part was actually whether the original PO was already realized in the P&L in the Q1 timeframe and Q4 of last year or there is more to come from that original order that you got?

Most of it has been realized but that order is part of bigger agreement that has additional things in it.

Understood. Okay, that’s it from me. Thank you very much for being able to answer all these questions. Thank you, guys. Keep up the good work.

Thanks.

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

Sure. Thank you, operator. As you can see RADCOM is firing on all pistons. We look forward to the remainder of the year and these exciting times where network transformation to the cloud is taking place and RADCOM is at the forefront of this transition and thank you for your participation.

Thank you. This concludes the RADCOM Ltd first quarter 2018 results conference call. Thank you for participation, you may go ahead and disconnect.