RADCOM Ltd. (RDCM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Results Conference Call for the Third Quarter of 2022. [Operator Instructions] As a reminder, this conference is being recorded and will be available for a replay on the company's website at www.radcom.com later today. On the call are Eyal Harari, RADCOM's CEO; and Hadar Rahav, RADCOMS's CFO. Please note that management has prepared a presentation for your reference that will be used during the call. If you still need to download it, you may do so through the link in the Investors section of RADCOM's website at www.radcom.com/investor-relations. Before we begin, I would like to review the safe harbor provision. Forward-looking statements in the conference call involve several risks and uncertainties, including, but not limited to, the company's statements about its full year 2022 revenue guidance, visibility and expected growth in 2023 and beyond. Expectations regarding the enterprise market for telecom operators, including trends in the market and effect of general economic conditions, continued investment in end benefits from research and development, its expectation to gain further interest from operators and play an important role in facilitating the transition to 5G its expectations about its pipeline and momentum, further demand for its products and growth, levels of expenses and keeping them below revenue, the potential for additional multiyear contracts, engagement and expansion of opportunities, the company's expectations with respect to its relationships with Rakuten and potential grants from the Israeli Innovation Authority. 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 and the company's SEC filings. In this conference call, management will refer 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 noncash stock-based compensation expenses, non-GAAP results provide information helpful in assessing RADCOM's core operating performance and evaluating and comparing the results of operations consistently 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 included in the quarter's earnings release available on our website. Now I would like to turn over the call to Eyal. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us for our third quarter 2022 earnings call. We achieved record revenues in the third quarter, reaching $12 million, representing the 13th consecutive quarter of year-over-year growth, double-digit growth of 17% compared to the third quarter of 2021. At the same time, we managed our expenses while investing in the business strategically and efficiently resulted in a non-GAAP net income for the quarter of $1 million a year high. We are proud of our best-in-class cloud assurance portfolio that enables operators to manage their networks with advanced AI-driven analytics that provides automated actionable insights to sales engineering manual labor and help quickly resolve network degradations to ensure great customer experience. We have built a resilient software-centric business with strong business model that delivers high gross margin and over 70% recurring revenue from the beginning of the year while offering our customers forecastable, long-term pricing structure and great value. Our multi-yield contract wins have improved a strong backlog, driving consistent results and giving us good visibility into 2023 and beyond. Turning to the pipeline. We continue to see strong demand for our advanced cloud assurance technology reflected in our healthy tighten of opportunities as we manage multiple customer engagements at different stages of the sales cycle with a healthy mix of new logos and the current installed base with most opportunities focused on. we see good momentum for the 5G market and believe it will be a catalyst for growth as the market ramps up, creating more sales engagements that can lead to additional multiyear contracts and increased market share. Recently, we have been hearing concerns for technology companies regarding the macro economies negative impact on the market. We believe the telecom market is robust as we saw during the more difficult periods of the COVID pandemic. We continue to monitor the situation closely and will adapt as necessary. We believe our position as a best-in-class assurance provider for cloud banking 5G networks and our cloud expertise and knowledge will continue to drive positive returns. We are glad to report that the demand looks strong, and we have a solid pipeline of opportunities that has the potential to increase our market share. With the positive market trends and our healthy pipeline, we are confident in the growth outlook of our business. In a software-focused company, we are very agile and can handle future growth prospects, scale and meet more demand while continuing to deliver on our current customer commitments. We are happy that the new customers are enjoying our RADCOM ACE software as we deployed in their networks and operate our teams utilize its capabilities to smartly monitor its quality. We are progressing positively, and we continue integrating our software into the cloud environment. As the 5G and cloud assurance leader, we are happy to be engaged with the teams work closely with them and offer our expertise to help them as they roll out 5G. With our existing teams, our software can scale seamlessly to many customers, which drives our financial performance and operational efficiencies, while at the same time, delivering on the customers' expectations and requirements. We are receiving positive feedback and are proud of our employees who are dedicated and committed to delivering on our customer success as we can continue to deploy our solutions and deliver new cutting-edge software releases. Legacy assurance solutions are limited and not flexible, while competitor takes weeks or months to deploy, we implement our cloud-based solutions in days or hours. Our software is the critical source of fruit for engineers who needs to make quick data-driven decisions affecting millions of subscribers across the entire network stack and all service offerings. We can adapt quickly and deliver features to customers. As we move forward and deploy our software to new customers like DISH, we see the value of our analytics through all stages of deployment to ensure a smooth network rollout and deliver great customer experiences. Turning to Rakuten in Japan and Rakuten Symphony. During the third quarter, we announced the renewal of our initial contract with Rakuten Mobile. With this agreement, we continue our successful partnership with this innovative operator, providing advanced cloud-native assurance solution for their network in Japan. At the beginning of the quarter, we announced that Rakuten Symphony made RADCOM ACE available in the Symworld marketplace. This integration of RADCOM ACE into Rakuten Symphony streamlines net operations and help teams understand what is happening in the in their network and where there are customers affecting issues. It is also provides building workflows and unified data analytics to enable more operators to rapidly deploy and roll out 5G with the Symphony platform. Being part of this cloud opened significant opportunities for Radon in the future. Turning to our product innovation. We continue our commitment to deliver best-in-class solutions as we enhance our software with more automation and intelligent AI-based capabilities to bring value and extend use cases for our customers as 5G technologies move forward. I am excited to announce that we recently received industry recognition as 2 of our products remain finalized in the telecom focused award programs that recognize the industry's top companies for the outstanding achievements in the next-generation communication technology, strategies and innovation. The IML based solution announced last year for automatic detection of network anomalies and automation in network operation teams was named finalist in the outstanding use case in the service provider AI category in the leading life 2022 awards. In addition, RADCOM ACE named as a finalist in the most innovative cloud offering category in the Grote 2022 awards program. We invest strategically in R&D to enhance our solutions, increase our 5G capabilities, expand our AI-driven insights and seamlessly integrate our solution into the cloud. All these capabilities aligned with the market needs and have already bore fruits as reflected by our recent wins. To summarize, I'm happy with our performance in the third quarter and across the first 9 months of 2022. Revenues are up year-over-year by double digits, and we significantly improved our bottom line. We have built a software-centric company with a strong business model that delivers high gross margins. Our team has a proven ability to provide best-in-class solutions to some of the most innovative operators in the world. We are working hard to deliver on our customers' commitments while continuing to invest strategically in our innovative software to boost features and capabilities. With these new wins and our ongoing sales engagements, we have good visibility, which led us to increase revenue guidance twice during the year's first 9 months. To conclude, we are optimistic about our ability to deliver a third consecutive growth year in 2022 and continue this trajectory into 2023. Accordingly, we are integrating our 2022 revenue guidance of $45 million to $48 million. With that, I would like to turn the call over to Hadar Rahav, our CFO, who will discuss the financial results in detail.

Thank you, Eyal, and good morning, everyone. To understand the results, I would refer mainly to non-GAAP numbers, which exclude share-based compensation. And please turn to Slide 8 for our financial highlights. We achieved record revenue in the third quarter, reaching $12 million representing a certain consecutive quarter of year-over-year revenue growth and an increase from $10.2 million in the third quarter of 2021, double-digit growth of 17%. This resulted in non-GAAP net income for the quarter of $1 million a full year high. At the same time, we continue to manage our expenses while investing in the business strategically in Beeline Brand. Our gross margin in the third quarter of 2022 on a non-GAAP basis was 73%. Please note in our gross margin can fluctuate depending on the revenue mix. We expect that Q4 will remain a tamale I will go down the expenses for the third quarter of 2022 on an annual basis, $4.6 million, an increase of $150,000 compared to the third quarter of 2021. We will see the grant of $187,000 from the Israel Innovation Authority during the quarter compared to $205,000 in the third quarter of last year. As a result, our net on expenses for the third quarter of 2022 on a non-GAAP basis as $4.5 million compared to $4.3 million in the third quarter of 2021. We expect the Israel Innovation Authority grant in the first quarter to be a similar level as in the third quarter. Sales and marketing expenses for the third quarter of 2022 or $2.8 million on an non-GAAP basis an increase of $595,000 compared to the third quarter of 2021. The increase in sales and marketing was aligned with the growth in backlog and the good progress we made delivering on our customer commitments. We expect sales and marketing to remain in the teal level in the third quarter. G&A expenses for the third quarter of 2022 were $958,000 on a non-GAAP basis, an increase of $181,000 compared to the third quarter of 2021. Operating income on a non-GAAP basis for the third quarter of 2022 with $545,000 compared to an operating growth of $200,000 for the third quarter of 2021. I making time for the eluate of 2022 on an annual basis was $963,000 or net income of $0.06 per diluted share compared to a net loss of $373,000 or net loss of $0.03 per diluted share for the third quarter of 2021. The positive net income was due to the increase in revenue and the severe impacts of changes in foreign exchange rates. On a GAAP basis, as you can see on Slide 7, our net loss for the third quarter of 2022 to 389,000 barrels or an egress of $0.03 per diluted share. This compares to a net loss of $1,069,000 or net loss of $0.08 per diluted share for the third quarter of 2021. At the end of the past quarter of 2022, our headcount was $289 million. Turning to the balance sheet. As you can see on Slide 11, cash, cash equivalents and short-term bank deposits as of September 30, 2022, was $70.8 million. That adds will prepared remarks. I will now turn the call back to the operator for your questions.

[Operator Instructions].The first question is from Arjun Bhatia of William Blair.

Congrats, guys, on a good quarter. Eyal, I wanted to start with you, it sounds like you're adding a lot more features and capabilities into the offering. So those are still building out 5G, you're clearly seeing good growth and customers are seeing the ROI. How do you think about pricing power going forward in the model, both with some of the newer rollouts and doing our existing customer base as well?

Yes. So we are continuing to invest in our recognized 5G platform. We released our 5G solution a couple of years ago. And since we are continuing enhancing our product. Lastly, we added our AI-based normally detection capabilities, which are very important to support customers in their 5G journey. We are really focused now on making sure we are creating additional value-added capabilities and use cases in order to make sure that our customers are successful in their journey as they are going to implement their 5G networks. We know that it's not simple and require them not only to deal with the 5G new carton technology, but also with the integration of cloud. So we are primarily focused on making sure the transformation will be a smooth as possible and as efficient as possible. Those edition and new capabilities are added, and some of them are used as differentiators when we are going and competing with new opportunities and some are becoming a possible upsell on existing customers that do not have those included. So overall, we are looking to continue to invest in our R&D, continue to create a lot of innovation, and we feel very comfortable with the offering to the market.

Okay. Understood. Very helpful. And then for Hadar, the margin that you generated this quarter, that was great to see. When you look out ahead over the next several quarters, where do you see the most opportunity for leverage in operating expenses going forward? Like is this a good run rate of operating expenses that you did in Q3? Or could we see more increases as a percentage of revenue in some areas like R&D, for example?

So in the last 2 years, we saw that our gross margin was around 72%, 73%. Our operating expenses are around $8 million per quarter. We believe that we will keep a seminal level of operating expenses with a slight increase in sales and marketing… [Technical Difficulty]

We didn't hear you for a moment. Please continue.

Okay. And so we believe that we will excluding any impact of the share dollar ratio, we believe that we will keep a similar level of derating expenses around the $8 million per quarter, with some in terms of increase in certain marketing expenses.

Yes. And maybe just last one for me. The Al, you called out the telco, the strength in telco [indiscernible] obviously investing in building out. Do you hear any sort of commentary from them walking back or being more cautious on CapEx spend going forward, just given how much it seems the economy has changed or is changing? Do you see them tightening their belts at all?

So overall, we see telecom industry being robust, and we see the 5G investment continues, but of course, the overall macro economy situation is affecting everyone and everyone is a bit more cautious and the interplay some delays for a large investment. The positive thing is that most of the operators are already committed to the country. Many of them are already in a new long-term plan that was already initiated and will continue to do so. There might be some slowdown. We don't know we continue to monitor that. The good thing for us is that we are targeting the Tier 1 larger and more powerful operators that are looking on the long-term strategy, and we see the final as an important part of the strategy, and we have good visibility. So we are monitoring this cautiously and hoping that there will be no effect on the macro economy, but really as in any case for any situation.

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

Let's just continue on that subject on the last question. So clearly, in the 5G deployments, those are multiyear long-term plans, but there are all other companies and customers that you have that are more, call on traditional still more in the pulp 4G arena that is in the technology in the older formats. Those seem like they could be more cyclical and more inclined to cut back. Can you talk to what portion of your business is tied to the 5G at this point? And how much of this is what I would call traditional or legacy customers.

So thank you, Alex. And as I pointed in my to talk about most of our pipeline of opportunities is around 5G. Also a big part of our existing business and the recent means we had earlier this year is around. What we see is that while there is some maybe education or a delay on the radio side, intimating the nationwide coverage investing the large CapEx part, and this you might see from the traditional radiate providers where we play in the insurance space, which is more on the core, this is not a heavy CapEx investment. And in many ways, they need more outer tools and we provide a lot of automation NII that allow them to do more with that. And as there are any more technologies that are not going to add more people to the operations and sometimes they need to optimize adding to hours can have to continue to do what they need in more efficient way, and it could also drive the need. There might be some operators that distort the journey for 5G and my delay. This could happen. But as mentioned, most of the providers that are already committed and continuing with the plans.

That's what I thought your answer would be. And looking at the history of the company, you've had a number of periods where you've had very good margins up in the 74, 75 range and some quarters where that's dipped down considerably lower towards the 70% level. And my understanding is that the primary difference between the higher-margin quarters and lower or margin quarters is the amount of traditional equipment you're selling, which tends to have lower margin. And so if the mix is shifting to the higher-margin 5G products and more and more towards trade software and fairly frictionless deploy at that. Then are we now in a period where the expansion the gross margins that occurred in '20 to '21 from 76% to 72.2% and now another, call it, 50 to 100 basis points in '22, where we can start talking about the longer-term gross margins up towards the 72% to 75% range as opposed to the 73% range that I think you've talked about historically.

Yes. So overall, we are seeing a trend of improved gross margin and getting closer to the 75% as we go more and more into 5G implementations. You will likely say that part of the revenue mix of decade some of the clients this was fluctuating a bit down the gross margin. But there is also that when we implement new customers, there are some onetime costs around third-party component licenses that are adding to the cost in most of the software is very high gross margin. So we sometimes see some fluctuation in the gross margin but what we see is that the overall trend is to have better and better gross margin and that is closer to the 75% ranges we continue to see.

Yes. So as we look in the fourth quarter, it looks like there's some upside to our model on the gross margin. Is the 73% mark that we did in the September quarter, the right level for the fourth quarter?

It's again from quarter-to-quarter results can fluctuate a bit because of the exact revenue rigs, but this is as good as some too.

So if that's the case, then you're really kind of at 73%. We've been modeling 71.3 out to '23 out '24. Should I be taking that up to 73% and using that as the new benchmark?

As I said, it makes sense as we go to something less.

Okay. Perfect. I just wanted to be clear on it. Can you remind us, you don't hedge the Shack pull at all and your sales outside the U.S. are all in dollars, correct? I mean outside the globally?

Correct, we did not it. So we had some upside from that as the share was weakening compared to the dollar. And most of our customers internationally are U.S. dollar-based be part of our revenues in dollars. So we don't have any significant effect from the foreign exchange.

So the shackles is pretty much on to loans for the year here at the end of the quarter. It's down considerably. I think it's a double-digit decline. So at these levels for the full year, that should help you on the OpEx. Are you reinvesting that OpEx? I think the comment was that you were going to increase sales and marketing slightly, but overall spend in dollars would be fairly flat. So as we look out to '23, is that a reinvestment in local currency and therefore, that's why you're able to keep it flat and still get the benefit of some additional investment.

Correct. So not going to keep our R&D, they are still before our end of the year plans, but the strategic, let's say, plan in the last couple of periods at moving forward, we believe we got to the right R&D level, of course, trying to take the advantage of the improved dollar-to-carat to against our efficiencies and maybe strengthen some of the areas. We do look into increasing in some level, the certain marketing in order to capture the market opportunity and part of our work around the world and as we are doing now is to make sure we have the good coverage where the 5 operators are more banks. So we do look to increase on the long run slightly the operation expense. But as we go and as I mentioned, more importantly, we are looking to grow next year. And as our operation expense in this is going to be modest, we look on better numbers on the bottom line.

This question was asked earlier about pricing, but I would like to rephrase that one a little bit. Is there a way that -- or is there any motion in the development cycle that would give you an opportunity to start doing some upsell to existing contracts by adding a bundle of additional features or some additional capability that might not have been covered by the existing contracts with some of your customers. Is there an upsell opportunity where we might start to see existing customers buying a larger package of product from you?

Definitely, we see a duty in the past as opportunities by customer and enhancing the technology cover is in essence the add-on applications use for additional use cases or additional product parts that are not necessarily part of what is doing today. We are spending our R&D to create additional innovation. And as I mentioned, it's both in or to add some upside upsells into our existing installed base, but for sure also to create additional cutting capabilities that will allow us to continue and will now contracts and penetrating into additional carriers.

One last question on before. So as we look out into '23, we've produced an average of double-digit growth over the last 3 years. So you dipped a little bit low in '21 but 14% plus in both '20 and '22. Is it reasonable to think that 23% is another double-digit growth rate? I realize that you haven't done your yet forecasting yet, and therefore, we're not going to hold you to it, but it seems pretty plausible that given the momentum that you've got that we see another double-digit year.

Yes we have good visibility to '23. There are many of our customer contracts are not. And we already see that 2023 looks like another growth figure likely in double digit. Again, it's still early, but we are looking positively to continue in a similar momentum and hopefully improve.

This concludes the RADCOM Ltd. Third Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.