RADCOM Ltd. (NASDAQ:RDCM) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference Call for the First Quarter of 2023. All participants are presently 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 radcom.com later today. On the call are Eyal Harari, RADCOM’s CEO, and Hadar Rahav, RADCOM’s 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/investor-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, as well as revenue from its business with AT&T, levels of gross margin, operating expenses and headcounts, 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, its expectation to gain further interest from operators and play an important role in facilitating the transition to 5G, the potential to leverage Continual’s technology and products to the benefit of RADCOM with Vodafone and other customers, its expectations about its pipeline, opportunities, leadership position and momentum, further demand for its products and growth, the Company’s expectations with respect to its relationships with AT&T Rakuten 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, 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 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 over the call to Eyal. Please go ahead.

Eyal Harari: Thanks, operator. Good morning, everyone, and thank you for joining us for our first quarter 2023 earnings call. We continued our strong momentum from 2022 into the first quarter of 2023 with a revenue increase of 13%, compared to the same quarter last year, a 15th consecutive quarter of year-over-year growth. Our solid performance and careful expense management improved all our profitability KPIs. We also introduced some new product use cases built using advanced AI for 5G. This quarter we significantly improved our profitability, tripling our non-GAAP net income, compared to the first quarter of 2022 and achieving a 15% non-GAAP net margin. In addition, we are happy to report that our GAAP profitability reached a four-year high, driven by solid team execution and increased revenues.

We also had an encouraging start to 2023 by securing a new logo in North America. Our solution will smartly collect, process, and analyze traffic in a highly automated way across both 5G and 4G networks, which helps the operator deliver high-quality services nationwide, while proactively ensuring great customer experiences. This exciting news continues the positive momentum since the beginning of 2022. 5G networks continue to roll out with telecom operators investing in infrastructure and new technology, while ensuring the seamless transition for some customer, so they receive top-quality services. At the same time, operators must be efficient and keep the costs at a reasonable level. Operators can use our innovative assurance technology to manage the network through actionable insights to ensure excellent customer experiences, while saving OpEx and driving automation.

This is our added value, which is why operators turn to our solutions. We continue to develop our AI-driven use cases to push our vision of autonomous networks that will help operators deliver great user experiences, save costs, and monetize their services. During the first quarter, we announced that we partnered with Rakuten Mobile to offer the telecom industry’s first Network Data Analytics Function, NWDAF in production. RADCOM NWDAF is a complementary product line to RADCOM ACE and part of our long-term vision of helping enable autonomous networks. The overall NWDAF market is at its very earliest stages, so the product will not generate revenue in the short-term. However, it is an important investment for the future as it is a native network function deployed in an operator’s network and not an add-on.

It uses the advanced AI to enhance the customer experience and drive closed-loop automation. This partnership with Rakuten demonstrates our market leadership and innovation in AI, automation, and 5G. AT&T remains a key strategic customer, and we believe our business will remain strong. Last year, we announced that AT&T renewed its multiple-year assurance contract with RADCOM as we continue to expand our relationship by providing additional value and cutting-edge software releases. We expect revenue from AT&T in 2023 to remain at a similar level to last year, with the potential for further growth. Turning to our product innovation. We continue our commitment to delivering innovative solutions as we enhance our software with additional automation and intelligence AI-based capabilities to bring the value and expand use cases for our customers as 5G technology moves forward.

During the quarter, we announced RADCOM’s Virtualized Network Operations Center or vNOC. This new use case is powered by extensive AI and enhanced with our telco domain knowledge to digitalize the network operations center for 5G. The vNOC helps operators transition from manual operations to automatically detecting anomalies and performing root cause analysis. This enables operators to solve customer-affecting issues and drastically improve resolution times, making network teams more efficient, while saving costs and improving the customer experience. We also advanced our cloud expertise, announcing tighter integration of RADCOM ACE with Amazon Web Services, AWS, so operators can gain complete assurance lifecycle management on AWS to drive network automation.

This provide operators adopting the public cloud with extensive operational agility that saves OpEx and enhances the user experience on AWS. We believe our integration into the cloud providers will help generate additional opportunities. In February, our sales team attended the Mobile World Congress in Barcelona, Spain, the leading telecom industry event, with an audience of almost 90,000 people from 202 countries. We were excited to once again engage in face-to-face meetings with customers, top-tier operators, and partners. We had many positive meetings, including interest in our new mobility experience offering acquired from Continual. We believe that some of these meetings could lead to new sales opportunities. As we covered in a recent blog post on the event, we saw evidence of our belief that automated assurance will be vital for 5G network operations.

Operators must make their network more intelligent, dynamic, and autonomous to deliver quality 5G services. So, strong themes were the transition to the cloud, network automation, and the importance of AI. All these are areas of interest for RADCOM, and the 5G market remains promising, while still in the early stages. The complexity of these new 5G network architectures requires automated assurance solution to provide the cornerstone to building a network with extensive automation. We also hear this from our customers. Now I would like to provide more color on Continual. In February, we entered into a definitive agreement to acquire Continual. After satisfying customary and transaction-specific closing conditions and regulatory approvals, we completed the acquisition in May.

Continual focuses on telco network analytics, specializing in mobility insights. These insights enable the operator to understand the movement of their customers and how to improve service quality and coverage, with a particular focus on the radio network and 5G. These mobility experience insights use AI technology and are cloud-based. So, they fit into our product philosophy and solution architecture, while adding value to our current offering. It will offer a differentiator from our competitors with Continual’s unique, innovative location-based technology. A modular add-on solution as a possible entry point into new accounts and an additional upsell opportunities into our install base. In addition, it brings us new logos, like Vodafone, and offers us opportunities to expand into different areas.

Finally, it adds further talent and telco domain knowledge to our team. We believe that adding Continual’s advanced mobility experience analytics, and intellectual property, will enrich our 5G assurance solution and create new opportunities for RADCOM. We see that new figures from GSMA Intelligence published during the Mobile World Congress shows that 5G connections are expected to double over the next two years, expedited by technological innovations and new network deployments in more than 30 countries in 2023 alone. As operators invest heavily in 5G, they seek new revenue streams to regain their investments and streamline network operations through cost savings. This trend is even more critical with the uncertainties around the macroeconomy.

So, we believe our position as an advanced automated assurance provider for 5G will continue to drive positive returns. Our pipeline continues to be healthy, with a good mix of opportunities from our current installed base and new customers. In 2023, we are gradually increasing our sales and marketing teams to accelerate growth. 5G is moving forward, but rollouts takes time. We are laser-focused on our business strategy and the 5G market. We believe our position as a leading assurance provider for cloud-native 5G networks and our cloud expertise and knowledge will continue to drive the growth of our business. To summarize. We have continued our strong momentum from 2022 into the first quarter of 2023. Our solid financial results demonstrate our successful strategy, execution, and unique market position in supporting telecom operators as they roll out 5G.

We believe this solid track record will drive consistent financial results in the future and continued improvements to the bottom line. We have a solid foundation in place for a strong 2023 and a fourth successive year of revenue growth. With that, I would like to turn the call over to Hadar Rahav, our CFO, who will discuss the financial results in detail.

Hadar Rahav: 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 first quarter, reaching $12 million, representing a 15th consecutive quarter of year-over-year revenue growth and an increase from $10.6 million in the first quarter of 2022. First quarter revenue grew by double-digits, with year-over-year growth of 13%. This resulted in non-GAAP net income for the quarter of $1.8 million, a five-year high. At the same time, we continue to manage our expenses, while investing in the business strategically and efficiently. Our gross margin in the first quarter of 2023 on a non-GAAP basis was 73%.

Please note that our gross margin may fluctuate 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 2023 on a non-GAAP basis were $4.2 million, a decrease of $724,000, compared to the first quarter of 2022. We received a grant of $262,000 from the Israel Innovation Authority during the quarter, compared to $218,000 in the first quarter of last year. As a result, our net R&D expenses for the first quarter of 2023 on a non-GAAP basis were $4 million, compared to $4.7 million in the first quarter of 2022. We expect the Israel Innovation Authority grant in the second quarter to be about $150,000. Sales and marketing expenses for the first quarter of 2023 were $3 million on a non-GAAP basis, an increase of $407,000, compared to the first quarter of 2022.

G&A expenses for the first quarter of 2023 were $964,000 on a non-GAAP basis, an increase of $139,000, compared to the first quarter of 2022. Operating income on a non-GAAP basis for the first quarter of 2023 was $833,000, compared to an operating loss of $274,000 for the first quarter of 2022. The increased revenue and favorable FX drove this growth. Net income for the first quarter of 2023 on a non-GAAP basis was $1.8 million or a net income of $0.12 per diluted share, compared to a net income of $614,000 or a net income of $0.04 per diluted share for the first quarter of 2022. On a GAAP basis, as you can see on slide seven, our net income for the first quarter of 2023 was $621,000 or a net income of $0.04 per diluted share. This compares to a net loss of $592,000, or a net loss of $0.04 per diluted share for the first quarter of 2022.

At the end of the first quarter of 2023, our headcount was 277. We expect our headcount to grow to approximately 300 in the second quarter. This increase includes additional sales and marketing employees and onboarding of the Continual team. We expect the Continual team’s onboarding to slightly increase our operating expenses, while helping to improve our topline as we integrate the solutions, upsell to our current install base, and sell to new customers as a unique product differentiator. Turning to the balance sheet. As shown on slide 11, our cash, cash equivalents, and short-term bank deposits as of March 31, 2023, were $77.9 million. That ends our prepared remarks. I will now turn the call back to the operator for your questions.

Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] First question is from Arjun Bhatia of William Blair. Please go ahead.

Operator: [Operator Instructions] The next question is from Alex Henderson of Needham & Company. Please go ahead.

Operator: This concludes the RADCOM Limited first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.