RADCOM Ltd. (RDCM) Q3 2018 Earnings Report, Transcript and Summary

Welcome to the RADCOM Ltd. Third Quarter 2018 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, and will be available for replay on the company's website www.radcom.com from November 7, 2018. On the call today is Yaron Ravkaie, RADCOM’s CEO; and Amir Hai, RADCOM’s CFO. By now we assume you have seen the earnings press release which was issued earlier today. It is available on all the major news feeds. Please note that management has prepared a presentation for your reference that will be used during the call. If you have now downloaded it yet you may do so through the link on the investor section of Radcom's website at www.radcom.com/investor-relations. If you've any trouble please send Mark Rolston an email at markr@radcom.com and he will send it you right away. 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, included but not limited to the company’s statements about its 2018 revenue and other performance guidance, such as gross margin, strategy, maintaining and enhancing our leadership position, launching new products and potential sales of such products, our pipeline, our long term prospects, the future of NFV and additional transition to NFV, industry trends including 5G Development, AT&Ts and other top tier carriers continuance as important customers. AT&Ts plans to virtualize its network, our relationship with the Galaxy operator and prospect of doing business with this operator, projected sales cycles, expanding relationships with top tier carriers and entering into new contracts with additional operators and potential customers, length of sales cycles and levels of investments in research and development and potential results of such investment. The company does not undertake to update forward looking statements. The full Safe Harbor provisions including risks that could cause actual results to differ from these forward looking statements are outlined in the presentation 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 the 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 web site. I'd 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 you directly. Now I'd like to turn the call over to Yaron. Please go ahead.

Thank you, Operator and thank you all for joining us today. During the quarter we continued to execute on our deployments with existing customers. We continue to work closely with AT&T as they maintained their leadership role in software defined networking. This quarter we expanded our business with AT&T as they move ahead with their NFV transformation, AT&T remains on track with their virtualization goals which are a crucial part of deploying services on the network edge and for the ultralow latency in 5G. We also continued our efforts with the previously mentioned galaxy operator as we work through their procurement processes and early planning for potential initial deployments. We maintain their business development and sales and marketing efforts with new operators and are in the early stages of several proof of concept demonstrations with top tier operators. Through this activity we have seen new use cases in 5G and NB-IoT which we are well equipped to handle due to the cloud native architecture of our solutions and our ability to deliver automation and high performance for such use cases. We continue to invest in research and development to maintain and extend our leadership position within the software defined virtualized network space. A growing product portfolio provides end to end network visibility, probe-basted service assurance and customer experience management. It offers tangible benefits to operators as they transition to virtualized networks and build their 5G ready clouds. We firmly believe that our ongoing investment in R&D will enhance our leadership position and result in innovative growth engines for the future. One of our new solutions is Radcom's network visibility which we announced earlier this year this cloud native solution is specifically designed to help operators gain full network visibility while efficiently managing and load balancing the virtual traffic for their NFV transformation. We're actively demonstrating this solution capabilities and creating a pipeline. Our position and long term prospects are enhanced by our strong balance sheet which allows us to continue to execute on our technology and sales strategies of targeting top tier operators transitioning to NFV even when facing longer sales cycle and lumpiness in our revenues. We are proud that by leveraging our leadership in telephone network virtualization the experienced gained from our current deployment, Radcom remains go to NFV trend for virtual probe-based service assurance and customer experience management. Yet the pace of NFV deployments and operators decisions on spending is not in our control and is slower than we previously expected. That being said we continue to see interest in our solutions there is ongoing activity around NFV transformations. We also see increased activity around 5G where we believe our solutions are needed. As a result we remain confident in our business strategy the future of NFV, superiority of our NFV offerings and the role Radcom expects to play in the NFV transformations to come. With that I'd turn the call over to Amir Hai, our CFO to discuss the financial results. Amir please?

Thank you, Yaron and hi everyone. Please turn to Slide 6 for our financial highlights to help you understand the results I would be referring mainly to non-GAAP numbers which excludes the share based compensation. Revenue for the quarter was $8.5 million down by 12% year over year. Our gross margin for the quarter was 81% on a non-GAAP basis in-line with our expectation and mostly due to increased software sales as a reminder we expect gross margin to continue to fluctuate depending on quarterly revenue mix and levels. Our gross R&D for the quarter on a non-GAAP basis increased to $3.7 million from $2.2 million in the third quarter of 2017. Also we received $528,000 from the [indiscernible] during the period compared to $155,000 in to third quarter of last year. As a result of our non-GAAP net R&D for the quarter was 3.2 million compared to the 2.1 million last year. Sales and marketing expenses for the quarter were 2.3 million on a non-GAAP basis similar to 2.2 million expenses in the third quarter of 2017. G&A expenses for the quarter on a non-GAAP basis totaled $647,000 compared $791,000 in the third quarter of 2017. Operating income on a non-GAAP basis for the quarter was $762,000 compared to $1.5 million in the third quarter of 2017. Net income for the quarter on a non-GAAP basis was $1 million or $0.07 per diluted share compared to $1.7 million or $0.14 per diluted share during the third quarter of 2017. On a GAAP basis as you can see on slide 5 we reported net income for the quarter of $634,000 or $0.05 per diluted share compared to $1.2 million or $0.10 per diluted share during the third quarter of 2017. At the end of the third quarter our total headcount was 232. Turning to the balance sheet, as you can see on slide 9 our cash and cash equivalents and short term bank deposit as of the end of the quarter was $67.6 million. Now turning to guidance, we are running [indiscernible] 2018 guidance we shared in our business update conference call on October 9, which indicated the revenue range of $33 million to $35 million. That ends our prepared remarks. I will now turn it back to the Operator and take your questions.

[Operator Instructions]. We have a question from Alex Henderson of Needham & Company. Please go ahead.

So obviously kind of rough numbers here over the short term. In the context of one of your largest customers or potential customers Verizon pretty sharply cutting back CapEx I mean they cut their CapEx back to essentially specially down over 20% for the fourth quarter, do you read this as kind of a timing issue around the tough conditions, is it just simply you know a slowdown in their spending and their process flow or alternatively do you think that there's some anxiety around how do we implement, how do we do some concerns around it needs to be more cloud centric that kind of stuff that is slowing down the entire NFV adoption rate more broadly in the industry. Can you talk about whether you think this is just short term wobble and conditions or something more in depth in the industry on the NFV space?

So I can talk about the NFV space Alex but I can't talk about the specific customer because it's their issues and also we're not disclosing outside of AT&T and globe we are not disclosing information of the specifics. I would say that specific customers might have some specific issues to their own way of how they're doing stuff. In general what I see across the industry is that there is no like everyone I think there's a consensus around NFV and I think you know and we all see AT&T is way ahead of everybody else and we also see that more and more carriers have gone through a some sort of an initial planning stage which some initial launches I would say non-transformational approach so different than AT&T they use more of a piecemeal approach and I think I've talked about that in the past. And in some cases how do they do the assurance of those they delay some of those decisions as they're ready to take the next step. We do see a lot of activity also with us around planning and understanding what should they do and how they should do it and they are taking a lot of our knowledge so I think I would summarize it as there are a some want I'm not sure the word stuck is the right word but they are staying in this planning stage until they understand how to roll the things out, and we see more and more of this planning. So I think at a certain stage they will move but this is what I see in the industry, I see more interest and more planning and more activity but still stuck at that stage with some moving forward.

Relative to 5G, there seems to be a lot of activity around the fixed wireless piece but still have a ways to go before we get into true radio access network deployment for consumer handsets. The timeline though does depend somewhat on network function virtualization as I understand it they can't really deploy the 5G architecture without NFV architecture, can you talk to that issue a little bit, where do you see there is timeline around 5G?

Yes. So you know there's also a lot of public information you AT&T and you see also Verizon in the U.S. and you see T-Mobile and you see everyone moving 5G with AT&T of course we have more knowledge that revert to the public knowledge but they're all very aggressive on the 5G and I think I see them more aggressive in North America than in other places while we see beginnings I think of course the Globe including in some of our emerging market existing customers and future potential customers. In North America I think they understand and the use cases that they want to deploy and there is also differences between the use cases that they're deploying, Verizon is more focused on deploying fixed broadband, AT&T have a different strategy I think you can it's public information so you guys can look at it. It's still a question mark when handsets will be available for this and I think I just saw the latest in [indiscernible] article from this morning says that the Chinese handset providers will have in 2019 already handsets that are 5G or supporting 5G, you know at the end of the day the modem in 5G and the handsets is a different model and today Qualcomm provides a modem not clear how [indiscernible] Intel is planning to provide a modem, Apple works more with intel and the Chinese more with Qualcomm so there's a complete happening around that space, but it seems to me that the it is being accelerated. When they deploy 5G, there is a need to do something with the assurance, or you know they can decide not to show it which probably won't happen in economies like North America and there are changes in the way that the network behaves there is new interfaces, new protocols and maybe the last thing about 5G, 5G the initial roll-out will be you know let's call them a quick and dirty roll out without the full architecture and benefits of 5G but already at this initial rollout things change so they need to do investments in the assurance there is a new interfaces, new -- the network behaves in a different way that they need to adapt to it. In the future there is even more changes which I think will drive two things, will drive a lot of innovation of how assurances being done on those and this is probably 20:20 and we're already working on these type of things and showcasing it to customers been being a very advanced cloud native in the things we have talked before and we continue to make R&D investments in this area and we believe that those two things will be a good strong driver for business.

So as we look out to CY19 [ph] do you think you're able to get back to double digit growth or do you think you're still declining probably in the first half at least maybe recovering in the back half and able to get 5% or 10% growth you know for the year or what's kind of the shape of the curve into '19 I realized there's a ton of unknowns in that question but for people have to model it out it's interesting problem.

Agree. You know at the end of the day with all the uncertainty and with I would say the hits that we took compared to our plan we don't believe it will be declining, we might have some more uncertainty in the first two quarters although I don't want to predict now decline in the first two quarters the nature of our business is very lumpy and it's enough that one [indiscernible] comes in January a one below [ph] in March and they can create the opposite effect and there are things in the works. And that is the digit growth for next year. I think the chances are slimmer. So and I think we haven't done our planning for next year but I think going into that planning we will be looking at basically continuing our investment in R&D which we've talked about also several weeks ago and we'll be looking at some growth may be making sure I think that the company is fully focused on booking and capturing deals as they come along.

Given the shackles at a 52 week low given the choppy outlook for the near term, are we talking about I think you are just under $15 million in R&D excluding the NRE benefits, would we be looking at $16 million-ish type spend next year and still continue to keep the pedal down or are you going to alternatively look at the world and say I need to conserve my cash a little bit and wait for this to recover.

I don't think we didn’t make those decisions yet, so I think a fair decision I would keep our R&D spend intact but we haven't gone through the budget planning you know at the end of the day the Board approvals it etcetera.

The next question is from Matt Stitler [ph] of William Blair. Please go ahead.

Thanks for taking my question, just a couple quick ones here. One I'd just be curious to get an update on competition, is something you guys talked about at business update calls. But I'm curious as you talk about lengthening of evolution cycles at potential customers can you talk about exploring different options for any of the strategies. Do we have these, are any of these more or less favorable to you from a competitive standpoint are you seeing any change on that front and what yours potential customers are evaluating here?

Look from the competitive landscape what we see primarily what we're hearing from the customers that we have the most advanced NFV offering that's the feedback during the sales cycle and the sales cycle is not like a one hour meeting, its deep dive and proof of concept and really popping the hood up and saying that when I look at competitor activity I see that they try to mimic our approach which also I think is a good thing because I think creates the market and I think from what I see we are able to maintain a very nice competitive advantage and I've talked about this in the past the fact that AT&T is a most aggressive transformation out there and we are participating in -- it drives the product forward and it drives the knowledge of all the engineers forward and so it's hard to beat somebody that is really deep with AT&T you know of course assuming that AT&T continue with full force as they have been doing which this looks like to be the case.

And then just one more as you've been talking and obviously in recent business updates and in your prior quarterly calls you have seen a placement option slow as far as NFV goes probably for these reasons we have discussed. Are you seeing that pace stabilize or is there -- do you see continuing incremental slowdown as we kind of get to the back end into the year here?

So I want to be a little careful because it's only four weeks from the previous call so I wouldn't expect like a major change but I would say that the company is all the time busy and I mean good busy in doing a lot of sales process and technical sales processes so you know proof of concept, workshop's and things like that with potential top tier carriers and this is not slowing down and then I would say we continue to get requests and new requests for these activity. So want to be careful not to say okay, speaking up or slowing down because it's very hard to assess what does it mean I think at the end of the day the [indiscernible] I touched on it when Alex asked these questions is that they're stuck in this planning stage. So you know at the end I think it’s a good trend that more and more are starting or are in their planning stage, you know when are they going to go and issue real POs [ph] that can affect our numbers is yet to be seen.

The next question is from Sasha Karim of IPI. Please go ahead.

In the past you've talked about potentially down the line the acquisitions, could you give us a feel for whether you're closer or farther away to making them and if so what kind of size? Thanks.

So you know what I said in the past that we might look at and acquisitions are the most sensitive thing in this marketplace and I can tell you that in general if we will do something it won't be something that tactical just to get us to a quarter, you know we are looking at ideas that the company has around strategic things and so they might take time and I can't say anything further than that.

And you look at your own cash balances I think its $67 million and you've always said you need some kind of a cushion there to give Tier 1 operators confidence that you are a viable growing concern. Is it possible that your actions would take you below your required cushion for that confidence or which may be right equity to fund large acquisitions if they are required?

I would say its theoretical questions at this stage. I will take the 5th as we say.

[Operator Instructions]. There are no further questions at this time. This concludes the Radcom Ltd third quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.