This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: 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.
spk00: 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.
spk04: 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.
spk06: Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Arjun Bhatia. Please go ahead.
spk02: Yep, perfect. Thank you, guys. You called out in your prepared remarks that the macro might be starting to have some impact on the 5G rollout at some telcos. Can you just elaborate that on a little bit? What are you seeing? How might that impact your business from a downstream perspective? And how severe or minimal are these push-outs?
spk00: Good morning. So, yes, as mentioned in the prepared remarks, we all see the macroeconomic pressure in general, and we see some operators reporting reducing some of their cap expand as part of their alignment to the new conditions. In general, we are still confident on the market evolving into 5G, and we still see a demand for our products. And as we executed well this quarter, we're expecting our growth journey to continue. We do still see that 5G is strategic to top operators, and they are still progressing with their 5G programs and continue to expand into evolving to 5G standalone, and by that, creating the demand for our products. We are seeing two, I would say, two separate influences. One is that our solutions with automation and AI are helping operators to save and be more efficient with their staff. And under this environment, this is highly required, and this is one of the things that enable and our customers and potential customers. We drive more demand to our requirements. And in parallel, we see some operators spending less on the 5G, which obviously we are targeting those operators, and it might slow things down. So I think those two things are kind of balancing, and we continue to see The demand is solid. We still have a solid pipeline. And we will continue to monitor the market advancement into 5G. But most important is that strategically, it's all going toward the right direction.
spk02: Okay. That makes sense. That's helpful. Thank you. And when you think about some of the newer capabilities that you've launched, you announced VDT with Continual. What does adoption of that look like? How do you think that plays out over time? And is that something that you incorporate into your core platform, something you monetize separately? How are you thinking about the strategy there?
spk00: So we are continuing to add more and more innovation around analytics and automation and the newly announced offering with with a virtual drive test or VDT is definitely part of it. It also aligns with what mentioned before of operator desire to find better ways to manage the operation and do things in a more advanced way, in a more efficient way. And VDT is definitely answering this need. We already started and we are in a good shape with the integration between the continual product lines in RADCOM, and this is all going to be part of our portfolio, while we are still offering the PDT as a standalone application on top of existing data sources the operator can provide. And obviously, you can get more value while you take the full package and integrate it with the RADCOM ACE. We start in this stage, we just concluded the the acquisition in May, and in the last few months, we are marketing this new offering, meeting our existing customers, new customers, and overall, the message is very positive. We already have new opportunities in our pipeline. As we know, sales cycle in Telecom is taking time, and we expect to see some of the results in 2024.
spk02: Okay, that's helpful. And just last one for me, on the Google Cloud partnership, it sounds like you have some customers that are live with ACE on GCP already. How does your customer base differ between the three big clouds? You have all three now. Is there one that you have more exposure to? I'm trying to figure out, I guess, how... How big of an opportunity this is now that you have GCP in addition to Azure and AWS on your platform?
spk00: So first, our vision, our strategy is we are aiming to be the leading solution in the cloud environment, and hence we want to be available for any cloud choice that the operator is preferring. We know different operators. We choose strategic partnerships with different cloud providers. Some work with AWS, some with Azure, some with Google. And we want to have our portfolio available for all of them. We build the product and architecture so it will be cloud-native and, by that, easily available on all different platforms. And we've seen some cases that some operators are using the mix. They want to have multiple cloud providers in order to have sometimes best of breathing to different applications, sometimes in order to minimize the strategic risk, backing all their workloads into one cloud platform. So our approach is to be available on all the leading platforms to expand our market, addressable market and availability. Google is very powerful in Europe. They are also very powerful in the analytics space. We are happy to see Google now added to our portfolio, and this new partnership is also extending the activity that was done around continual product lines in the last couple of years. And the fact that we are now available also in the Google Marketplace is opening up more doors. We are not betting, as I said, on one direction. We are looking to continue maintaining the integrations with the key cloud providers, and every one of them that is successful is good for us, as all the integration into cloud is an accelerator of adapting our technology as when operators move from legacy architecture into cloud, this is what drives the opportunity for us. So we will be happy to cooperate with all cloud providers, and more success for them is usually more success for us.
spk02: All right. Very helpful, Eyal. Thank you.
spk00: Thank you, Arjun.
spk06: If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. The next question is from Alex Henderson of Needham and Company. Please go ahead.
spk03: Thank you so much. So great quarter, and thanks for the nice prints pretty consistently. I'm looking at the number here and thinking you've got an acquisition that's adding 6% to the OPEX line, and I'm wondering if there was some of that in the June quarter or whether that is more of a sequential increase into the September quarter. What do you think OPEX should look like in both the third and fourth quarters? Is it going to be 5% or 6% above the $8 million that you just did, or what?
spk00: Thank you, Alex, and good morning. We already incorporated the operation expense of the acquisition in most. The results are better than expected due to both some advantage of the forex and the weakening of the shekel, which gained us some benefits, as well as higher, a bit higher than usual gross margin. We are expecting operation expense for next quarter to be in a similar level with some increase, as mentioned before, that we are continuing to invest into sales and marketing. But we already, let's say the step function that we mentioned last quarter is already in most of the numbers.
spk03: So am I Thinking then that given the run rate revenues in the back half of the year is going to be at the midpoint, that should be higher in 3Q and 4Q, or is there some offsets? Because you're running well ahead of street expectations for the year so far.
spk00: So we reiterate our guidance in terms of revenue and we are still looking to do in the 50 to 53 range, which means that we are likely to have a higher second half of the year in terms of the revenue. And if no change in the forex and we execute on our plans, then we continue to perform strongly for the rest of the year and see also a
spk03: Same with our friend on the bottom line. Mechanically, that would suggest that you're going to crack a million dollars in profits at the operating level in both FICQ and the ups from the first half EPS level. Is that a point at this point?
spk00: Yes. This makes sense. Again, under the current environment and for its conditions, it definitely gives us this potential.
spk03: That's helpful. In terms of the end markets, and I certainly get the macro impact commentary, but we are actually hearing that there's a deeper root problem with the 5G open core, cloud native core, that there's operational challenges that have come up that have undermined the ability of the service providers to continue to ramp their business. There was obviously very weak results at both Air Arts and Nokia in the 5G, particularly in the U.S., where U.S. operators are more cloudified than international operators. We've heard that they're cutting back on spending in 5G because of that, and specifically cutting back even on the RAN investments because of that. Can you comment on what you're seeing in terms of the efficacy and the performance of the existing 5G core technologies and whether there is any change in the willingness of the key customers to continue to push down that path, given what we're hearing from the field is some operational challenges?
spk00: So, overall... And I think this is the most important. Operators are strategically investing into 5G standalone. This direction continues. We don't see any operators hesitating with that. And actually, we are seeing more and more operators joining into this strategic investment with more and more commitment. This being said, it's true that this is a very complicated technology. It requires the cloud environment. introduce some complexity that the telecom industry still didn't solve. But it's also important to add that we are, this complexity means that there is more need and more value for our solutions. And therefore, while things are taking time and are likely to take time, as an industry, we are still trying to figure out how to build smartly the 5G network. We see that it's moving forward. We see companies like Dish and Rakuten continue to be very bullish with 5G. And with others, this is something that as an industry will be solved. And later operators that join the game, it will be easier and easier for them. I think that most of the weakness reported by companies like Nokia and Ericsson is driving from less spending to the radio. which is they covered a lot of the sales sites in North America where most of the population are based and maybe the higher value customers are based. And due to the economy, they are slowing down with their implementations. But in the fall, they are continuing to invest. This is eventually what will drive new services and new revenues. And what's been made now is the complexity. And I'm positive that this is something we will overcome as an industry and we continue to do so and identify those use cases that create a return on investment.
spk03: One more business model question. The interest income line rates have been going up a year. A similar sequential increase in the interest income line as we saw in each of the last couple of quarters where it's gone up pretty nicely, a couple hundred thousand dollars plus sequentially, or should we flatten it out at the current level?
spk05: Hi, Alex. Well, we experienced a decline of the interest rate, so we expect the financial income to be lower in the next quarter. Okay.
spk03: Like the interest income to come down a little bit in the September quarter?
spk05: Yes, correct.
spk03: More along the lines of the first quarter level, is that right?
spk05: Yes.
spk03: Okay, thank you. I'll see you at the floor.
spk06: The next question is from Charles Elliott of Inflection Point. Please go ahead.
spk01: I'd like to ask a specific question about VDT, virtual drive test. At the moment I understand that companies including Google, Apple, here TomTom, have vehicles driving around gathering data for 3D map making and this is a major investment. Would you be selling to those companies? selling in competition with those companies and would your channel be the map makers or the telecoms companies and the telecoms companies they then go into competition with the the map makers so the the visual addresses application is still offered to our traditional
spk00: customers, the mobile operators, the 5G carriers that are looking to optimize and ensure the customer experience on their network. Traditionally, we're using vehicles in order to go around the different geographies of the country in order to see what is the quality of service. This is very tedious, very costly, not so green, and we are adopting an approach that is a taking the analytics and based, using available data points in order to emulate and create what we call a virtual drug test, which not only saves on costs and more green, but also provides you much more information in terms of 24 by 7 analysis and in much better coverage. So go-to-market approach is very similar to our approach with the RadcoMates product. We see synergies between the two products, so definitely going into our install base and other prospects as an add-on and as an advantage is our key approach, as well as continuing to promote it as a standalone solution as it complements the RAN commands, but it can continue to run as a standalone on leveraging available data that the operators already can provide.
spk01: I'm sorry, so it's an extension of your quality assurance. It is not a map-making.
spk00: Yes. It's an extension of our quality assurance that could be as a standalone or as an add-on.
spk01: Thank you. And the second question is on R&D. At the gross and net levels, this is still a very high R&D spend, but it's down year on year. Why is that?
spk00: So the R&D expense is, as mentioned, we are looking to maintain on a similar level. We do see that percentage-wise, we see an increase as we increase the revenue and keep the R&D level in a similar number. The percentage-wise, we invest less in R&D. This quarter, we had... a one-time increase in the level due to the acquisition of continual and the onboarding of the R&D into our teams. This is why we have the incremental expense that should be our new working level. But we are looking to maintain the R&D level in similar numbers, again, taking into consideration the fixed effects. While we continue to grow on the top line, this should be allowing us to see improvement, as we proved in the last couple of years, significant improvement on the bottom line. Thank you.
spk01: I see the leverage around the R&D, but three months ended, June 22, your gap R&D number was 5.15 million, and it fell to 4.77 million in the latest quarter. Is that just currency having a funny impact, or has there been, in any way, a cut in your R&D spend?
spk00: It's primarily FX change that the check-in weakened, and therefore our numbers in dollars are a bit lower, with some optimizations we did along the beginning of the year, as I mentioned in previous calls. Mm-hmm.
spk01: Great. Thank you. That's great.
spk06: This concludes the RADCOM LTD second quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.
Disclaimer