Radcom Ltd.

Q1 2024 Earnings Conference Call

5/15/2024

spk04: today. On the call are Hewitt Hichman,
spk00: Good morning everyone and thank you for joining us for our first quarter 2024 earnings call. My name is Chiri Kitman. Before being appointed by the board as interim CEO, I served as RADCOM chief operating officer since 2020. I was responsible for the product development and customer success teams. Before becoming COO, I served as vice president of R&D from 2015 to 2020. During this time, I led the product transition from software to virtualization and finally to the cloud, including all the additional AI-powered capabilities and automation features provided to our customers as part of our solution offering. I want to thank the board for trusting me to lead the business as interim CEO. Since assuming the role, I've worked closely with the management team to ensure business continuity and that our positive momentum and profitable growth continue. The mandate is clear, and we are later focused on leveraging market opportunities to expand our sales with new logos for 5G. Turning to the first quarter results. We continued our strong positive momentum for 2023 into the first quarter of 2024, with record first quarter revenue that increased by 70.5% year-over-year. and 19 consecutive growth quarter. We achieved our highest ever cash level, ending the quarter with $85.3 million. We continued our profitability strategy and achieved positive income on a gap and a non-gap basis. We had an encouraging start to 2024 by renewing our multi-year contract with one of our key strategic customers, Rakuten Mobile. We continue to extend our collaboration and strengthen our partnership with this innovative operator. The contract extension includes advanced AI-powered analytics for its private cloud, enabling Rakuten Mobile to drive more automated network operations for its nationwide rollout. The partnership with Rakuten demonstrates our market leadership and innovation in AI, automation, the telecom network cloud, and 5G. In addition, we announced that a U.S. telecom operator extended its contract to use RadComAce. In this contract, The value we offer is that our solution will run on AWS as a SaaS. It is also available on other cloud platforms. Deploying RADCOME ACE on AWS will enable this operator to achieve a higher level of automation and gain real-time insight into the network. Operators rely on Assurance to navigate a smooth transition to 5G and the cloud. And our goal is to be the leading Assurance provider for this transition. Hence, we want to offer telecom operators the ability to choose whatever cloud provider or deployed model they want, and use our innovative assurance technology to manage their network transformation. SAS is a popular cloud computing offering that delivers a turnkey solution. Operators can access our cloud-based assurance software quickly and gain its benefit, as it has already been installed and configured. It also offers cost savings as operators don't need to invest in additional infrastructure. Furthermore, operators can scale their solution usage up and down based on specific needs. Offering SaaS provides customers with flexible options that can generate more sales opportunities for us in the future. This project reinforced the importance of our strategic journey to become a leading cloud assurance vendor and offer operators flexible SaaS options for deploying assurance in the cloud. Turn in to our customers and sales pipeline. We continue to provide innovative software enhancement and new releases to our install-based customers to help them manage their network, deliver more automation, and save operational costs. AT&T and DISH remain key strategic customers, and we believe our business will remain strong. In addition, as I noted previously, Our business with Rakuten Mobile remains strong following the renewal of our multi-year contract. Our pipeline is healthy based on our Radcom ACE product line and includes a good mix of new and existing customers. We see significant growth potential in our pipeline and have increased our sales team to ensure we fully capitalize on the growth opportunities ahead of us. We continue to work within the 5G cloud ecosystem for private, public, and hybrid networks. In the public cloud, we offer potential customers integration with all three leading public cloud providers. Our investments in the cloud ecosystem are being fruit, and we believe our integration with cloud providers will help generate additional opportunities. In previous calls, we mentioned the importance of Gen AI and that all the leading public cloud providers or hyperscalers are emerging as having a pivotal role in a Gen AI ecosystem. We see an opportunity to use our unique Telco Centrics Assurance skillset to help operators manage their network as they partner with hyperscalers entering the Telco space to facilitate operators' smooth transition to the cloud. Last year, we announced our position as one of the first assurance vendors to harness the power of GenAI for real-time management of 5G networks, RADCOM network. Our team continues to work on embedding GenAI technology into our solutions to enable innovation that helps operators manage their networks more dynamically and efficiently through AI and automation. As part of this effort, we announced the integration of our GenAI application with AWS. Although GenAI is in the innovation stage, customers see our innovation and thought leadership in this space, which can be a door opener that leads to other sales opportunities. We continue to engage with Operator Global through our sales and marketing activities, including direct meetings, tender processes, and conferences. operators are continuing to invest in their networks and roll out 5G. In the current macroeconomic landscape, operators are looking for innovative solutions to help them reduce costs while seeking additional revenue to use their significant investment in 5G. In addition, operators must ensure that subscribers enjoy top-quality services in this highly competitive market, a critical use case for assurance. This is an opportunity for Radcom. Operators can use our solution to ensure service quality while driving operational efficiency and generating revenue through service like private networks for enterprise customers. Radcom continues to be engaged in multiple opportunities for our innovative solution at different stage of maturity. We continue to enhance our software with additional automation. intelligence and AI-based capabilities and integration into the cloud to add value and expand our customers' use cases. The North Star that guides our product roadmap is to make networks more intelligent and autonomous through AI-powered analytics. We will continue innovating to help operators become more efficient and increase revenues for 5G. We announced generative AI applications support for Amazon Web Services so operators can roll out new services fast on AWS while improving operational efficiencies using Radcom ACE enhanced by generative AI. Radcom is a company with many years of expertise in the telco space. We know how to analyze data and deliver viable insight into the telecom operators. So we approach all our product innovation from this unique perspective, starting from a foundation of a good data and telco domain knowledge. By building Gen-AI products on top of this solid foundation, we are leveraging our know-how to provide innovative solutions that enable operators to use natural language to tap into the wealth of data Radcomace produces, helping operators work faster and more cost-effectively. To summarize, based on our good visibility into 2024, overall market opportunity and unique market position, supporting telecom operators as they roll out 5G and optimize costs. We remain well positioned to drive the business forward in 2024. Our multi-year contract also provides a strong backlog, driving consistent results and giving us good visibility. We are confident in delivering the fifth consecutive year of revenue growth, increasing our profitability, and continuing the last four years of growth momentum. This gives us the confidence to raise the lower end our 2024 revenue guidance to $57 million to $60 million. With that, I would like to turn the call over to Azar Ahav, our CFO, who will discuss the financial results in detail.
spk05: Thank you, Chilik, and good morning, everyone. To review our financial performance, while the slides contain GAAP and non-GAAP results, I will mainly refer to non-GAAP numbers, excluding stock-based compensation, acquisition-related expenses, and amortization of intangible assets related to acquisition. Now please turn to slide 8 for our financial highlights. First quarter revenue grew by 17.5%, reaching a new record of $14.1 million. This represents a 19th consecutive quarter of year-over-year revenue growth and an increase from $12 million in the first quarter of 2023. At the same time, we continue to manage and control our expenses while investing strategically and efficiently in increasing our investment in sales and marketing. This resulted in a non-GAAP net income of $2.8 million for the quarter. Our gross margin on an NGAP basis in the first quarter of 2024 was 74%. Note that our gross margin can vary slightly from quarter to quarter depending on the revenue mix. We expect that the second quarter will remain at a similar level. Our gross R&D expenses for the first quarter of 2024 on a non-debt basis were $4 million, a decrease of $168,000 compared to the first quarter of 2023. With the market evolving rapidly, our continued investment in research and development to extend our technological leadership within this space is vital. This is a key enabler for our future business. We will continue to invest strategically in R&D and maintain similar expenses as in 2023 to enhance our RATCOM-A solution, increase our 5G capabilities, expand our AI-driven insights, and seamlessly integrate our solution into the cloud. Excluding any impact from exchange rates, our R&D expenses in the next quarter will remain at a similar level with a slight increase. During the quarter, we received a grant of $209,000 from the Israel Innovation Authority compared to $262,000 in the first quarter of last year. As a result, on an NGAP basis, our R&D expenses for the first quarter of 2024 were $3.8 million compared to $4 million in the first quarter of 2023. We expect the Israel Innovation Authority grant to remain at a similar level in the second quarter. As announced in previous calls, we continue strategically investing in sales and marketing to expand our business and capture more opportunities in the 5G market. Towards the end of 2023, we made an incremental investment in sales and marketing. In the first quarter of 2024, sales and marketing expenses reached $3.8 million on a non-GAAP basis, an increase of $747,000 compared to the first quarter of 2023. In the following quarters, we expect a gradual increase in sales and marketing expenses to support an increase in pipeline of opportunities. G&A expenses for the first quarter of 2024 were $1.2 million on a non-GAAP basis, an increase of $210,000 from the first quarter of 2023. Thanks to increased revenue and careful expense management, operating income on an NGAP basis for the first quarter of 2024 was $1.7 million compared to $800,000 for the first quarter of 2023. Net income on an NGAP basis for the first quarter of 2024 was $2.8 million or $0.08 per diluted share compared to $1.8 million, or $0.12 per diluted share, for the first quarter of 2023. On a gap basis, as you can see on slide 8, our net income for the first quarter of 2024 was $762,000, or $0.05 per diluted share. This compared to a net income of $621,000, or a net income of per diluted share for the first quarter of 2023. At the end of the first quarter of 2024, our ad count was 296, the same as the previous quarter. We expect our ad count to remain similar in the second quarter. Turning to the balance sheet, as shown on slide 11, our cash, cash equivalents, and short-term bank deposits were $85.3 million as of March 31, 2024. That ends our prepared remarks. I will now turn the call back to the operator for your questions.
spk04: 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're using speaker equipment, kindly lift a 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 Alex Henderson of Needham and Company. Please go ahead.
spk03: Thanks. It's a nice quarter and certainly a great start for 2018. I wanted to address the linearity implied by the large beat in one cue versus only taking the low end of the guidance up. Was the first quarter a little of a lumpy quarter in terms of the lump into the quarter, and hence we should anticipate a more moderate result in the upcoming quarters? in terms of the year-over-year growth rate.
spk05: Okay. Hi, Alex. Thank you for your kind words. So as you saw, we raised the lower end of our revenue guidance, and we updated the guidance to 57 to 60, 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, we expect a similar trend on the bottom line. As announced in the previous course, we continue strategically investing in sales and marketing to make sure we have great visibility and enough boots on the ground to capture more opportunities in the 5G market. So part of the revenue increase will be used for sales investments. but most of it will go down to the bottom line.
spk03: I see. So, um, in the second quarter relative to the first quarter, it's fairly stable sequentially, I assume?
spk05: Yes.
spk03: Um, looking at the pipeline, um, you obviously had, uh, some nice, uh, news on Rakuten. The, um, the deal with Rakuten does sound like it's an expansion not just a renewal. Can you talk about, you know, the size of the, you know, upsell that's going?
spk05: So the renewal of the contract? Sorry.
spk03: Yeah, so can you talk about the upsell to your larger partners, not just Rakuten, as well as any others that you want to mention or put together? What is the large cohort of you know, the top tier ones look like in terms of ability to upsell in 24, and for that matter, into 25?
spk05: So about the contract with Rakuten, the renewal is in the same way as the previous one, but it has a few opportunities for extension. around the AI products and services. We have with our existing customers different opportunities in our pipeline, and we believe that some of them will be executed in the second half of 2024.
spk03: If I were to look at the pipeline, I think you said it was evenly split between both new customers and existing customers. Is that how you're expecting the incremental growth to play out? Or is it more due to new customers driving the upside to the revenue?
spk05: No, both. Also from existing and from new customers. Our pipeline is including a mix of opportunities from existing and from new customers.
spk03: So evenly split between the two, or is there a bias to one type versus the other?
spk05: No, it's 50-50. Okay.
spk03: Just in terms of the new products, I think you guys have had a fair amount of news new technology announcements and new product announcements, can you just talk a little bit about whether that's something that's starting to metastasize into the revenue streams?
spk00: I can think about the technology side of this product. Actually, you know, the Gen AI now is bringing to the table a new very dramatic opportunities, I mean, technology-wise. And we are actually acquisiting a lot of information, and our product is based on a lot of knowledge in the telecom and especially in cellular fields. And the combination between the two of these spaces I mean the information that we capture and analyze and save in our customers and the Gen-AI capabilities in understanding a lot of information and knowledge base bring a lot of significant capabilities for us and we believe it will bring a lot of opportunities in the future and even now. engagement that we have with customers in this area. All right. I'll see the floor. Thanks.
spk04: The next question is from Arjun Bhatia of William Blair. Please go ahead.
spk01: Yep, perfect. Thank you so much, and very nice job on the service share to the year. Maybe actually to continue on that last point, I'd like to When you think about all the new capabilities and all the innovation that you've added into the platform, obviously you're doing a lot with AI, with analytics, et cetera, right? How do you think your pricing strategy might evolve as you look at your existing customers? Obviously it's sticky and you want to capture the value. So talk about whether you think there is pricing power over time and how you maybe intend to use that as a lever.
spk05: Okay, so if you look at the task model, for example, so it's a win-win situation. On the one hand, it's a saving cost for the operator, and the operator saves the infrastructure, and for us, for Adcoms, As more operators will switch to the SAS model, you know, the marginal cost will decrease, and we will improve our gross margin. So this is from the financial aspect. Chirik, do you want to add anything?
spk02: No, no.
spk01: It's okay. Okay. Okay. Got it. And then, so, I guess the other piece, just as you're making more sales and marketing investments, can you just help us understand a little bit about how those are, how you're executing on those? I mean, is that mostly new sales reps that you're hiring to go after new telco accounts that you don't have? Is it pipeline conversion, you know, I assume a lot of this, I think we touched on this a little bit last quarter, that it's following the 5G ramp and that's kind of where you're really focusing, but how is that, you know, how is kind of the execution on that front going and where are the new reps kind of being targeted?
spk05: So we are following very carefully the evolution of 5G and primarily the 5G standard on And as we announced in our previous course, we saw that the early adopters in the market are in North America and in some advanced countries in Asia like Japan and South Korea. And then we focused on the last few years. In the last year, we started to see that more ways can start to progress. maybe in Europe, and you know that Europe is nowhere scattered. There are more operators in small countries, so we want to have enough coverage and to make sure we have enough booths on the ground, as I say. And also, we expanded our investment in sales and marketing and these are the things in order to make sure that we capture more and more opportunities and increase our market share. You may see this increase has already been reflected in the results of the first quarter. And we may see an additional increase, a gradual increase, in the second half of the year. Does that answer your question, Ojun?
spk01: Yes, very helpful. Thank you.
spk05: You're welcome.
spk04: The next question is from Jeff Myers of Cobia Capital. Please go ahead.
spk02: Thanks, guys. Congratulations on a good start to the year. I just wanted to ask about your Cash position, you know, is over an all-time high. What are your thoughts about that? Have you thought about a share buyback or a tender offer or something along those lines?
spk05: Okay. So in the last three years, we generated about $15 million. and it gives us a very strong position in the market and allows us to engage and to take more risk. Last year we did our first M&A transaction and we want to make sure that we have enough cash and sufficient level of cash to execute other relevant opportunities of M&A. A dividend or buyback is something that is being discussed, and the board and the company may allocate a limited level of cash for this purpose, but we don't see it as the key, as the strategic use of our cash. We use our cash for stability, for increasing our market share, and as I said, we want to maintain a sufficient level to engage and to make another M&A transaction.
spk02: Understood. I mean, I think you guys, it seems like you have enough cash to do all three things to maintain stability, do a buyback, and any acquisitions you might look at. But congratulations again. Thank you.
spk05: You're welcome. Thank you.
spk04: The next question is a follow-up question from Alex Henderson of Niedermann Company. Please go ahead.
spk03: Thanks. So listening to virtually every question, person who sells into the telecom space, it seems pretty clear that most of the telecom industry is under duress and cutting back on their budgets and spending. There's clearly been some challenges around the 5G core in terms of delivering a true multi-vendor modern API-driven, microservice-based architecture. And so when I talk to virtually every other company in the category, they're telling me that we're kind of in telecom winter here and that the pace of adoption of 5G is going to be slower than originally expected with challenges around delivering some of the advanced architecture, new features, features like network slicing and the like that were intended to monetize the 5G investments. So I think it was obvious that AT&T had tried to go down the path of multi-vendor and ended up with cutting out Nokia and going with Ericsson. So how does all of that affect you? Are you negatively impacted by it, or are you alternatively, and I think is the right answer, the answer to the problem and actually amplified by those issues because you're the solution to get them to the next plateau?
spk00: Yeah, exactly. I think, you know, in order to understand all the 5G evolution in the right context, context. But all the technology transition are derived from some valid and strong business. So actually 5G is the only way for transition to modern software-based and cloud-based networks for the telecom. So from what I see, we saw that the telecom is going to the autonomous journey and I think that the train has already left the station I know that there is some difficulties but again we are in the best position in this space and we have a lot of things to bring to the table to help them with this journey with the assurance and even with new aspects So I think that we are in a good position in all this 5G transition and autonomous network transition. I think it's going together, and I don't see any way that it will not happen eventually. Thank you. You have more questions about it?
spk03: Well, there's clearly a problem, right? I mean, I don't think there's any issue that anybody believes that the 5G core is working as expected. And, you know, AT&T was kind of at the center of that with the decision to go multi-vendor to standardize on Ericsson. So given the observation that there's a problem, is the Racketan, actually is the Radcom products the key to solving those problems. And so instead of slowing investment, they're actually accelerating investment with you.
spk00: Yes, that's true. I think that, you know, the fact that we are dealing with this space, with all the 5G and cloud-native transitions, and we bring the platform that customers rely on these transitions. So it's put us in a good position. We saw it in with all the customers that we are working with around all this 5G transition. The newcomers, it's very significant that we are that they are relying on our technology because they reduce costs by reduce people and we are in the best position because with our platform you can manage your network more efficiently and in a more scalable manner. I think it's very helpful to work with us on all this area.
spk04: Thank you. This concludes the RADCOM LTD first quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.
Disclaimer

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.

-

-