RADCOM Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Radcom Limited Results Conference Call for the Q3 of 2023. All participants are present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. 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.

Operator

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/investorrelations. 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 midsized software company, levels of gross margin, further increases to revenues and profitability in 2024, operating and stock based compensation expenses, headcount, expectations regarding continued rollouts in the 5 gs market and investments in networks, sales opportunities, pipeline, momentum, potential and expected growth, the effects of the war in Israel, its expectations with respect to investments in research and development and sales and marketing as well as grants from the Israel Innovation Authority, deployment of its 5 gs solutions in multiple cloud environments and the potential benefits to its clients, the potential of the company's product with respect to artificial intelligence and generative AI and customer satisfaction.

Operator

The company does not undertake to update forward looking statements. The full Safe Harbor provisions, including the 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 Radcom's core operating performance and evaluating and comparing the results of its 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.

Operator

Now, I would like to turn over the call to Eyal. Please go ahead.

Speaker 1

Thanks, operator. Good morning, everyone, and thank you for joining us for Q3 2023 earnings call. I wanted to start by commenting on the terrorist attack on October 7 and the situation in Israel. The Radcom family is upheld by the attack and wishes to extend our deepest sympathies and condolences to those affected. This was the worst attack in Israel's 75 years history and has been felt on a global scale.

Speaker 1

With victims from at least 30 nations affected by this strategy and over 240 people kidnapped, our heart is with them and we hope they will come home safely. We also pray for the victims, their families and their loved ones. We empathize with every individual impacted and strongly condemn the acts of violence that have occurred. We are confident in Israel's strengths that will not let Taro win. I want to thank all of our customers, partners and stakeholders for their unwavering support and best wishes and we are grateful for their continued confidence in Radcom.

Speaker 1

Our operations in Israel continue without interruption and we are tending to our employees and their families' needs and well-being. Our business continuity plan has been activated and while we are closely monitoring the situation, our Israel office is fully operational and running on all cylinders. Looking at the broader picture, most of our workforce is outside of Israel, so we don't expect these events to impact our overall business. As a software company, our operations are in the cloud, which means we are agile and can adapt to the evolving situation. Our global support center spend in multiple regions are all running as planned.

Speaker 1

We continue fulfilling our customer commitments, providing 20 fourseven support and focusing on growing the business. We remain steadfast in our commitment to driving the company forward. Our team continues to work diligently to fulfill our obligation for 2023 and pave the way for 2024. I want to express my appreciation for their hard work and devotion. Turning to Q3 results.

Speaker 1

The positive business momentum for the 1st 6 months continued in the Q3 of 2023. We achieved record quarterly revenues of $13,200,000 up double digit percentage and delivered 17th consecutive quarter of year over year revenue growth. Net income in the Q3 reached a 6 year high and we continue to improve our gross margin. Strong team execution led to good financial performance driving revenue growth and improving our bottom line. We believe that during the Q4 of this year, revenue growth and profitability improvements will continue and extend into 2024 as we provide operators with AI powered analytics to ensure excellent customer experiences.

Speaker 1

This reinforce our guidance as we expect to deliver a 4th consecutive growth year in 2023 and scale up a midsized software company for the first time in the company's history. Turning to our customers. We have made good progress in our existing and new accounts, thanks to our focused team performance. With the additional accounts activities increased by further customer expansions during the year, our existing teams scale to meet their higher demand and continue to provide value and deliver cutting edge software releases to our customer base. Turning to the 5 gs market.

Speaker 1

We see operators continue to roll out 5 gs and invest in their networks. The market direction is clear, while the pace may vary. We are engaged in multiple opportunities at different stages of maturity. These engagements include mix of new and current customers as operator continue their 5 gs transformation. Therefore, we increased our investment in sales and marketing to meet the expected demand for our carrier grade solutions.

Speaker 1

A couple of weeks ago, OpenSignal published in its latest mobile experience report on highly competitive Japanese market. It showed that just a 3.5 year after launching Rakuten Mobile efforts to deliver high quality, easily accessible mobile services has been validated by expert research. The report stated that the country's newest operator performs highly in several key measures. DISH announced another world first setting a significant simultaneous uplink downlink speed in the United States. DISH can offer faster 5 gs speed and low latency delivering better customer experience for data every application like video conferencing and uploads.

Speaker 1

Also, AT and T recently delivered strong results in the United States with solid 5 gs growth as they continue to invest in best in class 5 gs connectivity and enhance the largest wireless network in North America. In all these examples, we believe Assurant solution are vital in managing the complexities, ensuring subscribers receive excellent customer experiences and enjoy high quality services. So we continue to invest in R and D to enhance our product portfolio and provide customers with the best in class assurance solutions to help them drive their networks forward and innovate. Operators play in a highly competitive market, especially in the current economic climate, as they are pressured to control costs and streamline their processes. This trend leads them to rely on assurance to improve efficiencies across their operations.

Speaker 1

This could generate new opportunities for Radcom as they turn to the next generation cloud technology to optimize cost and roll out 5 gs. We continue to work within the 5 gs cloud ecosystem. We offer potential customers integration with all 3 leading public cloud providers, Amazon Web Services, Microsoft Azure and Google Cloud. In previous calls, I mentioned the importance of generative AI or Gen AI and all the leading public cloud providers or hyperscalers are emerging as having a pivotal role in the Gen AI ecosystem. We see an opportunity to bring our unique telco centric assurance skill set to have this hyperscaler boost their push into the cloud space.

Speaker 1

The team is already working hard on embedding GenAI technology into our solutions to enable innovations to help operator manage their networks more dynamically and efficiently through AI and automation. We hope to share some of those exciting updates in the Q4. Turning to our pipeline. Our pipeline continues to be healthy, offering further scope to grow the business with new and existing logos. Demand for our advanced assurance solution continued to be strong, boosted by the integration of continual unique technologies that has enriched our cloud focused portfolio.

Speaker 1

So we continue investing in the sales and marketing to create more sales engagement that can lead additional multiyear contracts and increase our market share. We continue to deliver innovative solutions and enhance our software with additional automation, intelligence and AI based capabilities to bring value and expand use cases for our customers as 5 gs technology moves forward. Over the last 10 months, we have announced multiple innovative capabilities and features to our solution. Our product strategy is making network more intelligent and autonomous through our AI powered analytics. As we begin our internal product work plan discussions for 2024 and beyond, we use these two pillars to guide our strategy that continue to drive the growth and transformation of the company.

Speaker 1

We will expand on this in our Q4 and the full year results. To summarize, we have made good progress in advancing our business performance, increasing revenues and improving profitability while seeking sustainable growth. We believe this positive momentum will continue in Q4 and beyond as we innovate and deliver value to our customers. Our pipeline continue to be healthy, offering growth opportunities with new and existing logos. Our progress in our overall business strategy demonstrates the value of our solutions and the strengths of our business model.

Speaker 1

Therefore, we reiterate 2023 revenue guidance of $50,000,000 to $53,000,000 With that, I would like to turn the call over to Adar Rav, our CFO, who will discuss the financial results in detail.

Speaker 2

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, acquisition related expenses and amortization of intangible acquisition assets. Now please turn to Slide 8 for the financial highlights. We achieved record revenues in the 3rd quarter, reaching $13,200,000 representing a 17th consecutive quarter of year over year revenue growth and an increase from 12.4% in the Q2 of 2023. 3rd quarter revenue grew by double digit with year over year growth of 10%.

Speaker 2

This resulted in non GAAP net income for the quarter of $2,400,000 a 6 year high. At the same time, we continue to take a deliberate approach to managing our expenses with a strong focus on innovation and investing in the business efficiently. Our gross margin on a non GAAP basis in the Q3 of 2023 was 75%. Please note that our gross margin Our gross R and D expenses for the Q3 of 2023 on a non GAAP basis were $4,300,000 a decrease of $302,000 compared to the Q3 of 2022. We received a grant of $104,000 from the Israel Innovation Authority during the quarter compared to 180 $7,000 in the Q3 of last year.

Speaker 2

As a result, on a non GAAP basis, our net R and D expenses for the Q3 of 2023 were $4,200,000 compared to $4,500,000 in the Q3 of 2022. We expect the Israel Innovation Authority grant in the 4th quarter to remain at a similar level. Sales and marketing expenses for the Q3 of 2023 were $3,400,000 on a non GAAP basis, an increase of $524,000 compared to the Q3 of 2022. G and A expenses for the Q3 of 2023 were $962,000 on a non GAAP basis, similar to the Q3 of 2022. Operating income on a non GAAP basis for the Q3 of 2023 was $1,400,000 compared to an operating income of $500,000 for the Q3 of 2022.

Speaker 2

The increased revenue drove this growth. Our financial income for the Q3 of 2023 was $1,000,000 mainly due to interest rate income on short term bank deposits. Net income for the Q3 of 2023 on a non GAAP basis was $2,400,000 or a net income of $0.15 per diluted share compared to a net income of $1,000,000 or a net income of $0.06 per diluted share for the Q3 of 2022. On a GAAP basis, as you can see on Slide 7, our net loss for the Q3 of 2023 was $300,000 or a net loss of $0.02 per diluted share. This compares to a net loss of $400,000 or a net loss of $0.03 per diluted share for the Q3 of 2022.

Speaker 2

This quarter, we recognized stock based compensation expenses in the amount of $2,500,000 compared to $1,200,000 in the first and the second quarters of the year. The increase in the 3rd quarter resulted from a change in a forfeiture rate estimation that led to a one time expense this quarter of $1,300,000 This estimation change reflects the company's success in retaining its key employees and the efficiency of the RCU grant plan from October 2021. We expect the stock based compensation expenses in the 4th quarter to be similar to previous levels. At the end of the Q3 of 2023, our headcount was 301. We expect our headcount to rise slightly in the 4th quarter.

Speaker 2

Turning to the balance sheet. As shown on Slide 11, our cash, cash equivalents and short term bank deposits as of September 30, 2023 were $78,600,000 That ends our prepared remarks. I will now turn the call back to the operator for your

Operator

questions. Thank The first question is from Arjun Bhatia of William Blair. Please go ahead.

Speaker 3

Hi, it's Faith on for Arjun. Just a couple of questions for you guys. You talked about overall the direction is clear in the market that 5 gs rollout is here, but can you talk about maybe how the pace is varying depending on the different sides and locations and what you guys are seeing there?

Speaker 1

Hi, good morning. So I think the most important to emphasize is that we see that we are able to continue our revenue growth with another consecutive quarter of double digit improvement to our revenue. And you can also see the immediate impact on our bottom line. We see that our net income about tripled both of this quarter and also if you look on the 9 months. We see that if the market is progressing even in the current phase, we are able to continue our growth and we are still very optimistic with the 5 gs development strategically.

Speaker 1

While overall pace is varying between customers, we see that as an industry, there is more and more activity in this space. While there are some operators go slow, there are many more operators that are investing now in 5 gs. So it's a matter of timing like always in telco. I think the most encouraging part for us is that we are managing to grow and continue to improve our performance KPIs very, very consistently.

Speaker 3

Okay. Thanks for the color on that. Then just another quick one. I know you guys called out you're working on embedding more AI solutions across the platform and you're going to be announcing these in the quarter or so. But if you had to talk high level where the general priorities are and what are customers asking for?

Speaker 3

Where do these kind of concentrate across your platform?

Speaker 1

So, Radcom invested in AI in the last 3 years as we feel that our cloud platform is an enabler to gain a lot of more value from the insurance platform we built. What we see that operators today are mainly looking for cost saving and improving efficiencies. The only way to do it is to replace labor intensive work with automation. So most of our AI efforts across the platform are to see how we can increase the operator efficiency by taking actions that are today done manually and automate them and close the loop as possible to gain not only the better efficiency in cost, but also when you do it with AI, you can gain much better quality that affects the customer experience. So we have the huge advantage that we have a lot of data set collected from the network by our monitoring capabilities and we leverage the AI technology to analyze them in real time and provide automation processes to close the loop and improve the network and by that gain those 2 goals.

Speaker 1

And as mentioned, I will elaborate more next quarter once we share more about our 2024 plans.

Operator

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

Speaker 4

Great. Thanks. And Eyal and team, just wanted to express my heart with you guys relative to this horrific terrorist attack on your country. And I hope all your employees and family are safe. Looking at the model, I think you commented that you expect gross margins to be similar to the Q3 in the Q4.

Speaker 4

That's quite a bit higher than recent quarters and kind of above the normal range. Can you talk a little bit about what in the mix is causing that and whether that's something that we should see persist into the 'twenty four timeframe Or will the mix regress back to more like a 72.5 type number that you've posted in a number of historical quarters?

Speaker 1

So, Alex, as you know, we and as we mentioned before, we see our gross margin is trending to improve as the revenue grows. We create some efficiencies that allow us to improve with scale also the gross margin and we are a software company and this allow us to be very profitable with the incremental revenue. What we are seeing now is depending as you recall on our revenue mix and trends that seem at a higher level is what we are looking for in the long run. This being said, on a quarter by quarter, there might be some fluctuations and we expect to vary between the range of the 70 to 75 most but trending to the 75 ish range as the revenue continues to grow. And this again as comment below was driving us with a significant improvement of our profitability, which is starting to be very sizable.

Speaker 4

Great. So it's logical then that we're going to have a 74% ish type margin here for the year. Is it reasonable to think that we're at least 74% 24%? It sounds like a good outcome.

Speaker 1

It's very hard to estimate exactly because there are might be some fluctuations, but you see what our performance in the last couple of years, you see the trend and I think this is where we are heading.

Speaker 4

Okay. Then on the OpEx side, can you remind us of what percentage of your cost structure is shekel based and what portion is outside of Israel. Obviously, the shekel weakness is setting up for a pretty easy set of compares on the OpEx in Israel.

Speaker 1

So about 40% of our employees are based in Israel. Most of them are high paid employees. So I believe around 60% or so, 60%, 6% to 30% of our cost is based on checkers, something really different. So

Speaker 4

have you guys done any hedging or are you

Speaker 1

No. Hedging, we did in the past from time to time some very short term hedging we've required, but currently we are mainly leveraging the shekel weakness and part of what helped us to continue to improve profitability.

Speaker 4

Giving guidance, but is there any reason to believe that is going to be any more than 4% or 5% growth in OpEx Because given the shekel level, it's a pretty good offset to any spending growth. And what do you think the merit rate raises look like into 2024?

Speaker 1

Again, we are still building our work for 2024 as we speak. We are if I look strategically, as mentioned, we keep our R and D in similar levels and we continue to incrementally increase our sales and marketing as we see additional opportunities and we want to have better coverage. Of course, foreign exchange fluctuations are not something we can expect. I guess once we have the 2024 plans, we will have better modeling and expectations. But the important part in this stage is that all things are trending very consistently, the revenue growth, the profitability, the gross margin.

Speaker 1

So I think you can get a good sense of the model for the company and where we are heading.

Speaker 4

Going down on the income statement, I was a little surprised the interest income declined quarter to quarter as you're generating solid cash, interest rates are rising. Is there some is there some charge or something of that sort in that line that caused it to come down $240,000 quarter to quarter?

Speaker 1

Sorry, Alex, can you repeat the question? I couldn't hear you well.

Speaker 4

I'm sorry. The interest income line declined $240,000 quarter to quarter. Given rising interest rates and rising cash balances, I would have thought it might have gone the other direction. Can you talk to why that occurred? Was there a charge or some offset?

Speaker 4

And do we expect it to recover sequentially in the December quarter back to the June quarter level?

Speaker 1

So interest rates fluctuate a bit and they were lower in the previous quarter compared to the quarter before. We see also in the net income also the changes in some of the foreign exchange that we have in some of our customer debt and so on. So overall, I believe this current level is a good estimation for what we expect in the near future. But it is probably due to both the change of interest rates and some foreign exchange that we are exposed to. And so most of All right.

Speaker 4

I was surprised that interest rates declined. I thought interest rates were going up. But okay, and any thoughts on the tax line? Last question for me.

Speaker 2

Zoe, can you repeat?

Speaker 1

About the tax?

Speaker 4

Yes. Any change in tax expectations going forward? I've heard that there are some increases in euro taxes coming down the pike that you're operating in certain geographies that might impact you? Anything?

Speaker 2

No. We explained the same level of expense in the Q4 and the year end in 2024.

Speaker 4

All right. Thanks. I appreciate your time and nice print.

Speaker 1

Thank you, Alex.

Operator

This concludes the Radcom 3rd quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.

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Earnings Conference Call
RADCOM Q3 2023
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