Radcom Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference call for the second quarter of 2023. All participants are present in a listen-only mode. Following management's formal presentation, instructions for the question and answer session will be given. For operator assistance during the conference, please press star zero. 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 CEO, and Hadar Rahab, Radcom 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 forward slash investor dash 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 2023 revenue guidance, the potential to scale up to a midsize software company, levels of gross margin, operating expenses, and headcount, expected growth in 2023 and beyond, expectations regarding the enterprise market for telecom operators, including trends in the market and the effect of general economic conditions, continued investment in and benefits from research and development, as well as sales and marketing. Its expectation to gain further interest from operators and play an important role in facilitating the transition to 5G, the potential to leverage continual technology and products to the benefit of RADCOM, its expectations about its pipeline opportunities, leadership positions, AI and cloud strategies, increase in market share and momentum, further demand for its products and growth, The company's expectations with respect to its relationships with AT&T, Rakuten, DISH, 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 non-cash stock-based compensation expenses, acquisition-related expenses, and amortization of intangible assets related to acquisitions, non-GAAP results provide information helpful in assessing RATCOM'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 the call over to Eyal. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us for our second quarter 2023 earnings call. This quarter, we achieved several all-time financial records and continued investing in our solutions to drive future growth. Revenues for the second quarter were $12.4 million, the 16th consecutive quarter of year-over-year growth. We significantly improved our bottom line, achieving net income for the second quarter and first six months of 2023 that hit a five-year high. The improvements in our profitability KPIs continued our strong momentum and are driven by strong execution and revenue increase. At the same time, With a robust business model, our software-centric company delivers high gross margins and recurring revenues, driving the business and providing good visibility into the future. A note on the business strategy. We announced last month the nomination of Mr. Andre Fuch to the Board of Directors. His nomination will be voted for at the AGM tomorrow. Andre has served in various senior executive positions at AT&T, the most recent of which was the Executive Vice President and CTO of Network Services. We are excited that Andre has accepted our invitation to be nominated, and I believe he will contribute significantly to the company's strategy and future growth. Turning to the 5G market, with uncertainty around the macroeconomy, some operators may take longer than others to roll out 5G, expand on transition to standalone 5G. Still, the market direction is clear, and we believe our position as a leading assurance provider for 5G will continue to drive positive returns. Not only does 5G complexity require assurance to help manage the networks with extensive automation, but operators also work in a highly competitive environment. They are under pressure to control cost and streamline their processes. So they also look to assurance and automation to improve efficiencies across their network operations. As mentioned in previous calls, our vision is to help telecom operators transition to more autonomous network. Our solution enables this through cutting-edge AI and analytics. Operators use our assurance technology to manage the network through actionable insight to ensure excellent customer experiences while saving OPEX and driving automation. This is our added value and why we are well-positioned to win additional business. An example of how our assurance solution helps operators roll out 5G is DISH. DISH is building one of the world's most advanced cloud-native 5G networks and the world's first standalone network on a public cloud. It recently announced that it had accomplished a significant industry milestone by providing network coverage to over 70% of the US population. Last week, DISH announced it is bringing an exclusive offer to Amazon Prime members to sign up for its mobile services. New customers can quickly sign up without setting foot in a retail store, which improves customer touchpoint and offers a completely digital experience. The DISH-Amazon partnership has lots of potential. Using cutting-edge technology, DISH and Amazon can offer innovation and on-demand services not limited by legacy infrastructure. Our assurance solution seamlessly integrates into AWS Cloud, enabling DISH to understand what is happening in their network 24-7. These insights are critical in helping drive a more intelligent 5G network and are key to delivering advanced 5G services to multiple verticals as the network build continues. We feel proud to be DISH's assurance partner as they create their network and meet these significant milestones along their journey, providing best-in-class assurance that ensures subscribers enjoy great customer experiences. Turning to our cloud strategy. With our solution maturity and cloud-native architecture, combined with our team's extensive cloud expertise, we continued integrated Garage.com ACE into the cloud ecosystem for 5G. We are excited to announce that we have launched our solution on Google Cloud last month. So we are now integrated with all three leading public cloud providers, Amazon Web Services, Microsoft Azure, and Google Cloud, extending our market availability to more potential customers. This new integration with Google Cloud has already received positive feedback from potential customers, and we have several ongoing opportunities for RADCOM ACE on Google Cloud. We offer multiple assurance use cases to automatically prevent service degradation, drive network automation, and save operational costs, powered by AI. Integrating with these top public cloud providers means Telco operator can choose whatever provider they want to use our assurance technology to manage their 5G rollouts. Turning to our AI strategy. Generative AI application, such as ChatGPT, GitHub Copilot, and others, have captured the imagination of people around the world. The latest generative AI applications and large language models can perform many tasks from automating complex tasks and analyzing massive amounts of data to providing personalized experiences. At its core, it is about creating smart machines that can think and act like humans and combines analytics, machine learning, natural language processing. In the telecom industry, generative AI can ingest documented processes to offer engineers interactive guides to speed up and simplify installation tasks and help operators identify areas where they are losing revenue or incurring revenue leakage. It can recommend troubleshooting actions and procedures to networking engineers when there is a network failure. We use AI to automate the network and automatically boost service quality, making the operator's network more intelligent and efficient through our solutions analytics. It enables the operator to transition to automated workflows with AI, doing the heavy lifting and analyzing massive amounts of data, providing insight that drives 5G network operations. As I will elaborate further, we continue to invest and develop our AI use cases. Turning to Continual. In May, we completed the acquisition of Continual. We believe that adding Continual's core assets will enrich our solution and create new opportunities for RADCOM in top-tier customer. The initial customer feedback has been positive and these engagements have already burned fruit with additional opportunities added to the pipeline. I am pleased with the progress and solution integrations made so far and believe this can generate more opportunities for RADCOM in the future. We announced the RADCOM Virtual Drive Test or RADCOM VDT launch as part of the solution integrations. Telecom operators spend significant OPEX on physical drive tests to ensure service quality. Typically, physical drive tests require a fleet of vehicles equipped with highly specialized electronic devices that drive around to test various network parameters in every geographical area. Our innovation solution, RadCom VDT, aims to replace physical drive tests with powerful AI capabilities. It offers Telecom operators a significantly more green, sustainable approach to drive tests. It also saves operators significant costs while providing better insights, helping boost the mobility experience for subscribers. Continual mobility experience analytics power the new solution. Turning to our product innovation. We continue investing in product development because we believe it is a crucial enabler for future business. We serve as the operator's smart co-pilot to help navigate 5G network complexities, which means continually evolving our assurance solution to maintain our 5G assurance leadership. I am excited to announce that the company and our products recently received industry recognition as we renamed finalists for the 2023 Leading Light Award. This telecom-focused program recognizes the industry's top companies' achievements in the next-generation communications technology, strategies, and innovation during the year. We renamed the finalists for Outstanding Use Case in AI and Machine Learning, awarded to a company that innovatively use AI to improve network performance, customer service, or business operation. We were also named as a finalist for Innovative Public Company of the Year, awarded to the company that stands out from its competitors and innovates constantly. Our North Star is making networks more intelligent and autonomous through our AI-powered analytics. We remain confident that our product offerings align with market needs, are best in class, and will increase our market share by winning opportunities as the 5G transformation progresses. As the 5G market evolves, we will continue investing in sales and marketing to take advantage of the increased assurance demand. To summarize, Our strong momentum continues with solid financial results that sets two all-time companies record for quarterly revenue and non-gap net income as we improve our profitability KPIs. This demonstrates that we are on the right path and we have unique market position supporting telecom operators as they roll out 5G. Our ongoing sales engagement shows that the demand for our solutions is robust. while also our multiple year contracts provide a strong backlog, driving consistent results and giving us good visibility into 2023 and beyond. At the same time, we are increasing our assurance capabilities and AI use cases to bring more value to customers while continuing our solution integrations into cloud ecosystem to expand the availability of our technology to additional operators. So we remain confident in our ability to cross the $50 million annual revenue threshold, scale up to a mid-sized software company for the first time in the company's history, and deliver a fourth consecutive growth year. Therefore, we are reiterating the 2023 revenue guidance of $50 million to $53 million. With that, I would like to turn the call over to Adar Ahav, our CFO, who will discuss the financial results in detail.

Thank you, Eyal, and good morning, everyone. To help you understand the results, I will refer mainly to non-GAAP numbers, excluding share-based compensation. Now please turn to slide eight for our financial highlights. We achieved record revenues in the second quarter reaching $12.4 million, representing a 16th consecutive quarter of year-over-year revenue growth and an increase from $12 million in the first quarter of 2023. Second quarter revenue grew by double digit with year-over-year growth of 11.2%. This resulted in non-GAAP net income for the quarter of $2.1 million, a six-year high. At the same time, we continue to manage our expenses while investing in the business strategically and efficiently. Our gross margin on a non-GAAP basis in the second quarter of 2023 was 73%. Please note that our gross margin may fluctuate between the quarters depending on the revenue mix. We expect that the third quarter will remain at a similar level. Our gross R&D expenses for the second quarter of 2023 on a non-GAAP basis were $4.4 million, a decrease of $290,000 compared to the second quarter of 2022. We received a grant of $180,000 from the Israel Innovation Authority during the quarter, compared to $197,000 in the first quarter of last year. As a result, on an ad-gap basis, our net R&D expenses for the second quarter of 2023 were $4.2 million, compared to $4.5 million in the second quarter of 2022. We expect the Israel Innovation Authority grant in the third quarter to be on a similar level. Sales and marketing expenses for the second quarter of 2023 were $3 million on an NGAP basis, an increase of $480,000 compared to the second quarter of 2022. G&A expenses for the second quarter of 2023 were $929,000 on a non-GAAP basis, an increase of $88,000 compared to the second quarter of 2022. As Eyal mentioned, this quarter we completed the acquisition of Continual LTD. Onboarding Continual teams increased our operating expenses by 6%. However, thanks to the positive impact of foreign change rates, the increase in total operating expenses from the previous quarter was lower than expected. In addition, at the closing date, the company allocated transaction price and recognized in its balance sheet goodwill and intangible assets in the amount of $3.2 million. Operating income on a non-GAAP basis for the second quarter of 2023 were $842,000 compared to an operating income of $176,000 for the second quarter of 2022. The increased revenue and favorable foreign exchange rates drove this growth. Our financial income for the second quarter of 2023 were $1.3 million, mainly due to interest rate income on short-term bank deposits. Net income for the second quarter of 2023 on a non-GAAP basis was $2.1 million or a net income of $0.13 per diluted share compared to a net income of $15,000 or a net income of less than $0.01 per diluted share for the second quarter of 2022. On a gap basis, as you can see on slide 7, our net income for the second quarter of 2023 was $781,000, or a net income of $0.05 per diluted share. This compares to a net loss of $1.3 million, or a net loss of $0.09 per diluted share, for the second quarter of 2022. At the end of the second quarter of 2023, our ad count was 298. We expect our ad count to remain similar in the third quarter. Turning to the balance sheet, as shown on slide 11, our cash equivalents and short-term bond deposits as of June 30, 2023, worth $78.3 million. That ends our prepared remarks. I will now turn the call back to the operator for your questions.