Radcom Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference Call for the fourth quarter and full year 2023 results. All participants are present in the listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded and will be available for replay on the company's website at www.radcom.com later today. On the call are Eyal Harari, Radcom's CEO, and Hadar Rahab, Radcom's CFO. Please note that management has prepared a presentation for your reference that will be used during the call. If you have not downloaded it yet, you may do so through the link in the Investors section of Radcom's website at www.radcom.com 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 full-year 2024 revenue guidance, the 5G market and industry trends, and expected increase in standalone 5G launches, the role the company is expected to play in the 5G transformation, expected increases in sales activities and opportunities, its pipeline, the expected impact of currency rates, the company's market position, cash position, potential and expected growth and profitability in 2024 and thereafter, its expectations with respect to research and development, and sales and marketing expenses. as well as grants from the Israel Innovations Authority, the company's expectations with respect to its relationships with Akuten, DISH, AT&T, and Vodafone, its expectation to continue enhancing its software solutions and demand for its solutions, of the role of its 5G solutions in cloud development, its ability to capitalize on 5G opportunities and win more market share, and the potential of the company's use of artificial intelligence in its products. 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, financial income expenses, acquisition-related expenses, and amortization of intangible assets related to acquisitions, 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 general 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 fourth quarter and full year 2023 earnings call. You may have seen that earlier today we announced a CEO transition. I will be stepping down as a CEO, and Guy Shemesh will succeed me. I wish Guy and the Radcom team success in the coming years. Radcom was my home for over 20 years in various leadership positions. Radcom is close to my heart, and I will remain in an advisory role to ensure a smooth transition and help ensure the company's continued success. Let me start with the financial results and the business updates, and then I will discuss the transition in my summary. 2023 marked an exceptional and record year for Radcom, extending the momentum of the last four years of growth. We achieved a revenue milestone of 51.6 million, representing 12% growth year-over-year, a fourth consecutive growth year. In the fourth quarter, revenue was 14 million, representing a year-over-year growth of 14%, while our net margin reached a record level. We continued our path to sustained profitability, achieving a record net income of $10.2 million on a non-GAAP basis, or $2.7 million on a gap basis for 2023. Our finances strengthened due to the positive cash flow that reached a record level of cash and cash equivalents, totaling $82.2 million with no debt. We crossed the $50 million annual revenue threshold and scaled to a mid-sized software company. In 2023, our team executed well while delivering a record year, laying the foundation for the robust 2024 and beyond. I am proud of our employees and thank them for their dedication and commitment to delivering on our customer success and goal strategy during the year. Our strong results highlight the importance of our industry-leading solutions in the growing 5G market. Looking at 2024, thanks to our strong execution and current visibility, we are confident in delivering a fifth consecutive year year of revenue growth and increasing our profitable growth metrics. Our full year 2024 revenue guidance is $56 to $60 million. Since the October 7th attack and their resulting situation, our operation in Israel and globally have continued without interruption. While closely monitoring the situation, our Israel office is fully operational and running normally. At the same time, our business continuity plan is active, so we are prepared for any changes to the current situation. As demonstrated in the fourth quarter of 2023, our team works diligently to fulfill our customer obligations, grow the business and drive the company forward. For our customers, we continue to provide software enhancement and to introduce new innovation software releases to assist them in managing their networks and ensuring great customer experiences. In 2023, we secured several new orders from our existing customer base, increasing our overall revenue from existing customers compared to 2022. AT&T, Dish, and Rakuten remain key strategic customers. We believe our business with them will remain strong. We expect revenue from these customers in 2024 to stay at a similar level to last year with potential for further growth. Due to the continual acquisition, we added Vodafone as a new customer in 2023. Vodafone is a British multinational operator operating in 21 countries, which provides potential growth area for more business in the future. During 2024, we will expand our focus on our sales activities to meet the expected 5G standalone monitoring demand with our leading 5G assurance solutions. Operators rely on assurance to navigate the transition to 5G and enhance operational efficiency. As they adopt next-generation cloud technology to optimize costs and roll out 5G, the current macroeconomics landscape presents new opportunities for RadCom a leading global cloud native assurance solution. We continue to enhance our software with additional automation, analytics, and intelligence, and AI-based capabilities to bring value and expand use cases for our customers as the adoption of the 5G technology progresses. We also rolled out... a product we acquired as part of the continual acquisition to help operators improve the customer experience while reducing costs. These product initiatives have already gained traction with potential customers and could lead to additional business. As I mentioned, our product strategy is making networks more intelligent and autonomous through AI-powered analytics to save costs, improve the customer experience, and drive operational efficiencies. Recently, we announced our position as one of the first assurance vendors to harness the power of generative artificial intelligence, or GenAI, for real-time and efficient management of 5G networks. Radcom's NetOck. We are approaching this from the unique perspective of a company with years of expertise in the telco space and an advanced AI-powered analytics point of view. These NetTalk applications enable operators to adopt the power of GenAI and trusted data to manage their network operations faster and cost-effectively. Executives and engineers can use natural language to tap into the wealth of data Radcomace produces as its analyzed service quality. Operators can talk with their network and leverage the rich insights through RADCOM GenAI applications using customized large language models, LLMs. GenAI will be a hot topic in 2024, and we will be showcasing our RADCOM network use cases, which will continue to develop throughout the year, starting the Mobile World Congress at the end of February in Barcelona. Our market leading solutions thoughtfully aligned with operator needs, which drives revenue, reduce operational costs and provide unique technology to address critical network challenges. We are confident that our unique innovative offering will drive sustained growth. Our pipeline continues to be healthy with good mix of opportunities from our current install base and new customers. In 2024, we will expand and focus on our sales activities, which we believe will lead to additional contracts and increased market share. To summarize, 2023 was an exceptional record year for Radcom, continuing the last four years of growth momentum. We believe our strong sales and marketing engagements shows that the demand for our solution is robust. Our multi-year contracts also provide a strong backlog, driving consistent results and driving us good visibility into 2024 and beyond. Therefore, we are confident in delivering fifth consecutive year of revenue growth, further increasing our profitability and continuing the positive momentum in 2024.

Thank you, Eyal, and good morning, everyone. Now, please turn to slide eight for financial highlights. While the slides contain GAAP and non-GAAP results, it would refer mainly to non-GAAP numbers, excluding share-based compensation, acquisition-related expenses, and amortization of intangible assets related to acquisition and financial income expenses. We concluded the fourth quarter of 2023 with $14 million in revenue and making a new record quarter and an increase from $12.3 million in the fourth quarter of 2022. Our gross margin on a non-GAAP basis in the fourth quarter of 2023 was 76%. Please note that our gross margin can fluctuate depending on the revenue mix. Our gross R&D expenses for the fourth quarter of 2023 on a non-GAAP basis was $3.9 million, a decrease of $785,000 compared to the fourth quarter of 2022. we received a grant of $190,000 from the Israel Innovation Authority during the quarter compared to $160,000 in the fourth quarter of last year. Our net R&D expenses for the fourth quarter of 2023 on a non-GATS basis were $3.7 million, a decrease of $815,000 compared to the fourth quarter of 2022. Sales and marketing expenses for the fourth quarter of 2023 were $3.3 million on a non-GAAP basis, an increase of $401,000 compared to the fourth quarter of 2022. G&A expenses for the fourth quarter of 2023 on a non-GAAP basis were $978,000 with no significant change from the fourth quarter of 2022. Operating income on a non-GAAP basis for the fourth quarter of 2023 was $2.7 million, 19% of revenue, compared to an operating income of $608,000, 5% of revenue for the fourth quarter of 2022. Net income for the fourth quarter of 2023 on a non-GAAP basis was a record of $3.8 million, 27% of revenue or a net income of 25 cents per diluted share compared to a net income of $1.3 million, 11% of revenue or a net income of 9 cents per diluted share for the fourth quarter of 2022. On a gap basis, as you can see on slide seven, our net income for the fourth quarter of 2023 reached an all-time high of $2.6 million, 19% of revenue, or a net income of 70 cents per diluted share compared to a net loss of $26,000 or a net loss of 0 cents per diluted share for the fourth quarter of 2022. At the end of the fourth quarter of 2023, our outcome was 295. Now let's turn to the full year results. We ended 2023 with revenue of $51.6 million, an increase of 12% from $46.1 million in 2022. On a non-GAAP basis, our gross margin was 74% in 2023, compared to 73% in 2022. Our gross R&D expenses for 2023 on a non-GAAP basis were $16.9 million, a decrease of $2.1 million compared to 2022. In 2024, we plan on investing in R&D at approximately the same level as in 2023. We received a cumulative grant from the Israel Innovation Authority for $736,000 during the year. In 2024, we expect grants from the Israel Innovation Authority to be at the same level as in 2023. Sales and marketing expenses in 2023 were $12.7 million on a non-GAAP basis compared to $10.9 million in 2022. In 2024, we expect a gradual increase in sales and marketing to support an increasing pipeline of opportunities. G&A expenses for 2023 on a non-GAAP basis were $3.8 million, an increase of $268,000 compared to the entire year of 2022. Operating income on a non-GAAP basis for 2023 was also an all-time high of $5.7 million, 11% of revenue, compared to an operating income of $1.1 million, 2% of revenue for 2022. Net income for 2023 on a non-GAAP basis was a record of $10.2 million, 20% of revenue or a net income of $0.67 per diluted share compared to a net income of $2.9 million, 6% of revenue or a net income of 19 cents per diluted share for 2022. On a gap basis, as you can see on slide seven, our net income for 2023 was another record of $3.7 million, 7% of revenue, or a net income of 24 cents per diluted share, compared to a net loss of $2.3 million or a net loss of $0.16 per diluted share for 2022. In 2024, we believe the dollar-shekel ratio will stabilize at the current levels and not require hedging. Turning to the balance sheet. As shown on slide 11, our cash equivalents and short-term bank deposits as of December 31, 2023, were $82.2 million. As was mentioned in the previous quarter, in 2023, we completed continual acquisition in the amount of $2.5 million. Thanks to our strong results, we generated a positive cash flow of $4.5 million, which led us to end the year with our highest level of cash. Now I will pass the call back to Eyal to summarize.

As I mentioned at the start of my remarks, I am stepping down after over four years as a CEO and 20 years in various leadership roles within the company. It has been an honor to lead the incredible team at Radcom. I am proud to have led the company to suppress the 50 million annual revenue threshold and scale the company up to a mid-sized company for the first time while achieving profitable growth. I'm leaving the company in a healthy situation with excellent visibility into 2024 for continued growth and increased profitability while I move to my next challenge. Radcom is in the hands of a capable and talented management team. I am confident that together they will continue to lead the company, drive further growth, and achieve new heights under Guy's leadership. Thank you to all the employees, customers, investors, and partners I worked with who have put their trust in the company, and I wish the board, Guy, and RadCom every success. That concludes our prepared remarks. I will turn the call back to the operator for your questions.

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 two. 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 of William Blair. Please go ahead.

Perfect. Thank you, guys, and, Al, congrats on the run, and it's been great working with you. Best of luck in the next chapter here. If I can start off on AI, you know, it seems like some exciting announcements coming with NetTalk, but, Al, can you maybe just talk a little bit about how generative AI makes RADCOM and Assurance in general may be a little bit more strategic and raises its profile. What are you looking for as the key kind of indicators that you're getting traction at customers and at telcos and that these Gen AI capabilities are resonating and adding value for your customer base?

Hi. Good morning. Thanks, Arjun, for the time, Waltz. Gen AI is a big trend, not only for the telco industry, but for all the tech, and we are looking to see how we can leverage this disruptive advancement. We believe RADCOM is uniquely positioned as we collect a goldmine of data from the network by monitoring the real customer experience of all subscribers using other services. We are leveraging AI technology for the last three or more years, trying to create automation and efficiency for the operators. And with the Gen AI, we are trying to take it to the next level. So the idea is that we are becoming like a co-pilot for the operator, enabling the engineers to do their tasks more efficiently and become even better experts In their domain, because we make both our solution and all the data it provides, as well as some industry standards and specs, we made it all available and accessible. And by that, we empowered the engineers. This creates efficiencies for the operator. It allows them to work with more efficient teams. And, of course, it also drives, eventually, improvement in customer experience. So this is where we are heading today. We are also looking at this strategically, and we believe that in the next three to five years, Gen-AI will continue to evolve, and we'll be able to do even more sophisticated tasks that the technology is not mature today. And eventually, the goal is to allow the Gen-AI to do the closed loop and really improve the network by analyzing and taking the directives from from the, you know, from the country, do the deep analysis of, of the, try to understand the network condition and close the loop with a configuration or setting of the network. And by that not only drive efficiency, but also improve network and improve customer experience.

That's a, that's very helpful. And you, um, You talked about in your prepared remarks, you know, the pipeline and how you'll invest in sales and marketing. When you're looking at Gen AI specifically and maybe some of the early signs of success that you're having, do you anticipate that that will come through some of the customers that are earlier in the pipeline, the new customers coming in, or do you think you'll primarily get these capabilities adopted, at least initially, with your existing customer base?

So the Gen AI is now in an innovation stage. We are not foreseeing revenue in 2024 directly from those investments. It is important for our customers to see our innovation and our thought leadership in the space, and they want to see our roadmap and our vision. So the influence is mainly indirectly. When we look on our pipeline, which is very strong, and we have very good visibility into 2020, to continue our goals journey and accelerate. This is based on our Radco Maze product line with our new and existing customers. And I believe that Gen AI will be more long-term contributor.

Okay, got it. And then just maybe touching on the pipeline, you did mention that you'll make some incremental sales and marketing investments because you're seeing demand, which certainly makes a lot of sense. Can you just maybe give us a sense for where you're seeing traction in the pipeline and the incremental resources that you're dedicating to sales and marketing? Is that to grow, get more customers in the pipeline or convert the existing customer? Just give us a sense for where you'll be directing those in 2024.

Sure. So as I discussed this also in previous calls, we are following very carefully the evolution of 5G and primarily the 5G standalone, what I call the strategic 5G. What we see is that the early adopters in the market are in North America and some advanced countries in Asia like Japan and South Korea. And this is where we started to put our focus already a few years back. In the last couple of years, we are starting to accelerate our self-investment as we see additional regions start to progress, and I believe 2024 is going to be pivotal for 5G SA technology. We see more efforts and more progress in Europe. Europe, as we know, is more scattered. There are more operators in smaller countries, and we beef up the team in order to make sure we have good visibility and enough roots on the ground want to capture the opportunity. And we will continue to invest during the year in order to make sure we keep with the 5G pace. We have the privilege that our customers are really known. We know what they are doing. We see their buying frequencies. We see them partnering with their network vendors to build their 5G network. And we see their public announcement on when they are going to 5G SAVE. And this is where our solution becomes critical. As we see that the market is going to the next step, we are also going to the next step with our sales and marketing. And if I would quantify that, we are talking about 20% to 30% increase in our teams globally, again, with the main focus in Europe, but also increasing some of our other teams as where we see both already coming and opportunities in our pipeline, and very importantly, where we want to continue and increase our pipeline to support our multi-year growth plan.

Okay, perfect. Very helpful. I'll leave it there. Thank you, guys, and I appreciate you taking the questions. Thank you, Odin.

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

I was a little surprised that you decided to move on at such a young age. I don't understand it. It's just hard to fathom, but congratulations on the decision. I was hoping you could talk a little bit about the rate of growth. You've produced double-digit growth in each of the last two years. Is it reasonable to think that in 2024 that public budget growth is attainable on the top line? And you mentioned several times in the call potentially accelerating it. Is it reasonable to think that the acceleration is going to happen here?

Thank you, Alex. Yes, as you saw our guidance for the year, we are looking to continue at minimum with double-digit growth, and if you look on the higher range of our guidance, this could be further accelerating compared to what we do today. Our business model with over 70% recurring revenue is supporting our long-term growth, and it's all based on the execution on keeping the run rate and further evolve with our existing customers and winning new logos and enhancing our market share. I believe that 2024 is the year that we will start to see more in a 5G essay, as I previously commented, and this is why we continue and increase ourselves in marketing. So definitely the plan is to, and the trajectory is to continue this double-digit growth over the monthly year, And I'm personally optimistic that we can actually accelerate our goals, and it all depends on the pace of the operator adopting the 5G SA, getting into live, and our ability to execute well and win those new logos. From past experience and with 20 years in the telco, usually with any technology evolution, it takes a lot of time, but once the technology is maturing, then you start to see the adoption rate goes much higher. And the next 18 to 24 months is where we expect the 5G assay to really become more popular, and this is why I definitely believe there is a potential to accelerate the growth even further.

So given that backdrop, you know, 10% drop, plus growth, you're talking about a pretty significant acceleration in spending around sales and marketing, if I'm reading it correctly, a 20% to 30% increase in the number of teams. Does that give us a sense of what you think the sales and marketing line is likely to do under that scenario? Are we talking about compression in operating margins this year?

So, We are in a process of shifting and moving resources from R&D to sales and marketing. The increase is incremental, so we will get some of the increase in the first part of the year and some of the increase will come only later in the year. And as an answer to Arjun, this will follow the development of the 5G S8. So I think this is the best vote of confidence in the business we see, and we will adapt it to the pace of new 5G SA RFPs that we see, new opportunities we want to cover. We want to make sure we don't miss the market opportunity, and we believe the next, as I said, 18 to 24 months are going to be critical to win the market share, and we want to be ready with the teams. We are going to focus in... We're already very strong in North America. We are going to increase our presence in Europe. And in specific countries, we find we're the best fit to our product lines where quality matters, where we are looking for innovation, where we look for assurance solutions that will allow them to do the transformation, like Japan, as we worked for many years with Rakuten. And this is why we are coming with this strategy.

I understand the strategy and looking for some quantification of the strategy. Is it reasonable to think, given the commentary around sales and marketing expansion, that you're going to compress the operating margins in 2024?

No, the operator margin will improve as we are looking to grow significantly in the revenue and the overall increase in the operational costs will be lower than the increase in the revenue.

So if I'm talking about 20% to 30% increase in the number of teams, what does that translate in terms of the sales and marketing expansion? That's clearly well ahead of your revenue growth. Even if I hold the R&D flat, it wouldn't be enough to produce that type of investment growth. So what am I doing to offset it? Are there other elements of the sales and marketing costs coming down as a result of the mixed shift within sales and marketing? How do I get 20% to 30% increase in the number of teams without increasing the cost by a similar amount?

As mentioned, we are going to be – lowering our R&D expense to cover some of the goals in the sales and marketing. And overall, the sales and marketing is not the biggest expense for the company, so it's not that we're going to increase the overall operation expense in 20%. And we're going to have only moderate increase to the operating expense because of this shift. And the sales and marketing increase of teams will take gradually. So on the overall numbers over the year, we are going to have lower impact as it's not a full impact from January. Some of them will come in the second part of the year. Okay. Thank you.

The next question is from Charles Elliott, IPI. Please go ahead.

Thank you. Thanks very much for all you did for the shareholders over the last few years, and good luck. In terms of your future, are you going on to an equally active role, or is it more likely you take a sort of chairman's position or non-executive positions?

Sorry, can you repeat the question?

I'm sorry, is this better? Can you hear me better now? Yes. Executive role or non-executive or something like an active chairman?

I'm going to be supporting the company and guys in the transition for the next period of time, making sure Radcom is going to be successful. And in parallel, I will later share my plans on what I'm going to do next. But no, I'm not going to stay as a chairman or in the board of Radcom.

Thank you. A few more questions. With your balance sheet so full of cash and the company now generating free cash flow, is it a prospect that Radcom returns some free cash returns more to investors through buybacks or through a dividend increase? Or do you want to conserve your cash to get revenues well above $100 million in a few years and grow further from there?

So it's more of the second. We still believe that while we are generating cash and profitable and we generate over $20 million in the last two to three years, this allows us to have a very good position in the market, first and foremost with our customers that we are It allows us to engage and take more risk in terms of seeing how we can increase our market share. We did our first M&A last year, and we believe there might be opportunities to further increase our strategic position in the market, and we want to make sure that we have this opportunity. And the option of... dividends or buybacks is something being discussed, but we believe that in the current stage there is a better use. We're looking on keeping our strategic position and keeping the options for additional M&As that will allow us further growth.

Thank you. And one final question. You mentioned Vodafone. Did it through your acquisition of Continual, or was this a kind of Greenfield's new customer win? And should we look at this as a similar size to some of your big customers now, like Rakuten or AT&T even, or is it significantly smaller at the moment?

At the moment, it is significantly smaller. It is a customer win. we inherent with M&A of Continual Vodafone was the key customer for Continual one of the values we saw by partnering Continual and create this great synergy we believe that with the power of Radcom the richer product set that we have and the wider portfolio we can further expand with more value we are working today with Vodafone as a As a certified vendor, it allows us to have better visibility to the requirements and needs. We are working with a few countries, but Vodafone is a large enterprise with many operations around Europe mainly and out of Europe, and we believe that with the RADCOM power and technology, we can further expand both with the original continual product line as well as the RADCOM A's, and its technology. So it definitely can scale into a size of Rakuten or even AT&T, as Vodafone as an enterprise is very large. But at this stage, we have initial activity with them, but I believe this relationship could further grow in the near future. That's great. Thank you. Thank you very much.

This concludes the RADCOM LTD fourth quarter and full year 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.