RADCOM Ltd. (NASDAQ:RDCM) Q3 2023 Earnings Call Transcript

RADCOM Ltd. (NASDAQ:RDCM) Q3 2023 Earnings Call Transcript November 8, 2023

RADCOM Ltd. beats earnings expectations. Reported EPS is $0.15, expectations were $0.07.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference Call for the Third Quarter 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. [Operator Instructions]. 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 Rahav, 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/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, the potential to scale up to a mid-size 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 5G 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 5G solutions in multiple cloud environments and the potential benefits to its clients, the potential of the Company’s products with respect to artificial intelligence and generative-AI and customer satisfaction.

The Company does not undertake to update forward-looking statements. The full safe harbor provisions, including risks that could cause actual results to differ from these forward-looking statements, are outlined in the presentation and the Company’s SEC filings. In this conference call, management will refer to certain non-GAAP financial measures, which are provided to enhance the user’s overall understanding of the Company’s financial performance. By excluding certain non-cash stock-based compensation expenses, acquisition related expenses, and amortization of intangible assets related to acquisitions, non-GAAP results provide information helpful in assessing 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 third quarter 2023 earnings call. I want to start by commenting on the terrorist attack on October 7th and the situation in Israel. The RADCOM family is appalled by the attack and wishes to extend our deepest sympathies and condolences to those affected. This was the worst attack in Israel’s 75-year history and has been felt on a global scale, with victims from at least 30 nations affected by this tragedy 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 strength that will not let terror win. I want to thank all our customers, partners, and stakeholders for their unwavering support and best wishes, and we are grateful for their continued confidence in RADCOM. 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 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 centers span multiple regions and are all running as planned. We continue fulfilling our customer commitments, providing 24/7 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 obligations for 2023 and pave the way for 2024. I want to express my appreciation for their hard work and devotion. Turning to Q3 results. The positive business momentum for the first six months continued in the third quarter of 2023. We achieved record quarterly revenues of $13.2 million, up a double-digit percentage, and delivered a seventeenth consecutive quarter of year-over-year revenue growth. Net income in the third quarter reached a six-year high, and we continued 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 fourth quarter 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 This reinforces our guidance as we expect to deliver a fourth consecutive growth year in 2023 and scale up to a mid-size 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 account activities, increased by further customer expansions during the year, our existing teams scaled to meet the higher demand and continued to provide value and deliver cutting-edge software releases to our customer base.

Turning to the 5G market. We see operators continue to roll out 5G 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 a mix of new and current customers as operators continue their 5G transformation. Therefore, we increased our investment in sales and marketing to meet the expected demand for our carrier-grade solutions. A couple of weeks ago, Open Signal published its latest mobile network experience report on the highly competitive Japanese market. It showed that just three-and-a-half years after launching, Rakuten Mobile’s efforts to deliver high-quality, easily accessible mobile services had been validated by expert research.

A software engineer focused on a computer screen, writing code to create a conversational assistant.

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 5G speeds and low latency, delivering a better customer experience for data-heavy applications like video conferencing and uploads. Also, AT&T recently delivered strong results in the United States with solid 5G growth as they continue to invest in best-in-class 5G connectivity and enhance the largest wireless network in North America. In all these examples, we believe assurance solutions are vital in managing the complexity, ensuring subscribers receive excellent customer experiences and enjoy high-quality services.

So, we continue to invest in R&D to enhance our product portfolio and provide customers with 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. This could generate new opportunities for RADCOM as they turn to next-generation cloud technology to optimize costs and roll out 5G. We continue to work within the 5G cloud ecosystem. We offer potential customers integration with all three 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 skillset to help these hyperscalers boost their push into the cloud space. The team is already working hard on embedding Gen AI technology into our solutions to enable innovations, to help operators manage their networks more dynamically and efficiently through AI and automation. We hope to share some of these exciting updates in the fourth quarter. 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 solutions continues to be strong, boosted by the integration of Continual’s unique technology that has enriched our cloud-focused portfolio.

So, we continue investing in sales and marketing to create more sales engagements that can lead to additional multi-year contracts and increased 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 5G technology moves forward. Over the last ten months, we have announced multiple innovative capabilities and features to our solution. Our product strategy is making networks 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 continues to drive the growth and transformation of the company.

We will expand on this in our fourth quarter and 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 continues 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 strength of our business model. Therefore, we reiterate 2023 revenue guidance of $50 million to $53 million. 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, acquisition-related expenses, and amortization of intangible acquisition assets. Now, please turn to Slide eight for our financial highlights. We achieved record revenues in the third quarter, reaching $13.2 million, representing a 17th consecutive quarter of year-over-year revenue growth and an increase from $12.4 in the second quarter of 2023. Third quarter revenue grew by double-digits, with year-over-year growth of 10%. This resulted in non-GAAP net income for the quarter of $2.4 million, a six-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 business efficiently.

Our gross margin on a non-GAAP basis in the third quarter of 2023 was 75%. Please note that our gross margin may fluctuate between the quarters depending on the revenue mix. We expect that the fourth quarter will remain at a similar level. Our gross R&D expenses for the third quarter of 2023 on a non-GAAP basis were $4.3 million, a decrease of $302,000 compared to the third quarter of 2022. We received a grant of $104,000 from the Israel Innovation Authority during the quarter, compared to $187,000 in the third quarter of last year. As a result, on a non-GAAP basis, our net R&D expenses for the third quarter of 2023 were $4.2 million, compared to $4.5 million in the third quarter of 2022. We expect the Israel Innovation Authority grant in the fourth quarter to remain at a similar level.

Sales and marketing expenses for the third quarter of 2023 were $3.4 million on a non-GAAP basis, an increase of $524,000 compared to the third quarter of 2022. G&A expenses for the third quarter of 2023 were $962,000 on a non-GAAP basis, similar to the third quarter of 2022. Operating income on a non-GAAP basis for the third quarter of 2023 was $1.4 million compared to an operating income of %0.5 for the third quarter of 2022. The increased revenue drove this growth. Our financial income for the third quarter of 2023 was $1 million, mainly due to interest rate income on short-term bank deposits. Net income for the third quarter of 2023 on a non-GAAP basis was $2.4 million or a net income of $0.15 per diluted share compared to a net income of $1 million or a net income of $0.06 per diluted share for the third quarter of 2022.

On a GAAP basis, as you can see on Slide seven, our net loss for the third quarter of 2023 was $0.3 million or a net loss of $0.02 per diluted share. This compares to a net loss of $0.4 million or a net loss of $0.03 per diluted share for the third quarter of 2022. This quarter, we recognized stock-based compensation expenses in the amount of $2.5 million, compared to $1.2 million in the first and second quarters of the year. The increase in the third quarter resulted from a change in a forfeiture rate estimation that led to a one-time expense this quarter of $1.3 million. This estimation change reflects the company’s success in retaining its key employees and the efficiency of the RSU grant plan from October 2021. We expect the stock-based compensation expenses in the fourth quarter to be similar to previous levels.

At the end of the third quarter of 2023, our headcount was $301. We expect our headcount to rise slightly in the fourth quarter. 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 $78.6 million. That ends our prepared remarks. I will now turn the call back to the operator for your questions.

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

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Q&A Session

Unidentified Analyst: Hi. It’s [indiscernible] for Arjun. Just a couple questions for you guys. You talked about overall the directions clear in the market, that 5G 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?

Eyal Harari: 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 triples both for this quarter and also if you look on the nine months. We see that if the market is progressing even in the current pace, we are able to continue our growth and we are still very optimistic with the 5G development as we see as I mentioned in my previous remark, that operators see 5G strategically. While overall pace is varying between customers, we see that as an industry, there is more and more activity in this pace.

While there are some operators going slow, there are many more operators that are invested now in 5G. 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 APIs very, very consistently.

Unidentified Analyst: Okay. Thanks for the color on that. And 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 next quarter. So, but if you had to talk high level where the general priorities are and what are customers asking for, where do these kind of concentrate across your platform?

Eyal Harari: So RADCOM invested in AI in the last three years as we feel that our cloud platform is unable to gain a lot of more value from the insurance platform we built. What we see that operator today are mainly looking for cost sizing 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 and 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 sets 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 goes to goals.

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

Unidentified Analyst: All right. Perfect. Well, that’s it for me. Thank you, guys. Congrats again on the quarter.

Eyal Harari: Thank you.

Operator: The next question is from Alexander Henderson of Needham & Company. Please go ahead.

Alexander Henderson: Great. Thanks. And Eyal and team, I just wanted to express my hearts 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 third quarter in the fourth quarter. 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 2024 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?

Eyal Harari: So, Alex, as you know, we – and as we mentioned before, we see our gross margin is trending to improve as the revenue goes. We create some efficiencies that allow us to improve with scale, also the gross margin and we are a software company and this allows us to be very profitable with incremental revenue. What we are seeing now is depending as you recall on our revenue mix and it trends that similar higher level is what we are looking for on the long run. This being said, on the 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, a comment below was driving us with the significant improvement of our profitability, which is starting to be very sizable.

Alexander Henderson: 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 in 2024? It sounds like a good outcome.

Eyal Harari: It’s very hard to estimate exactly because there 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 what we are heading.

Alexander Henderson: 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 Israe?

Eyal Harari: 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% of our cost is based on shekels, something in this range.

Alexander Henderson: So, have you guys done any hedging or are you [indiscernible] on that?

Eyal Harari: No. Typically, most of our cash is in U.S. dollars and we did in the past from time-to-time some very short and edging if required, but currently we are mainly leveraging the shekel weakness and part of what helps us to continue for profitability.

Alexander Henderson: With given guidance, is there any reason to believe that it 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 rates look like in the 2024?

Eyal Harari: Again, we are still building our work in for 2024, as we speak, if I look strategically as mentioned, we keep our R&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 expectations, but the important part in this stage is that all things are trending very consistently, the revenue growth, the profitability, the gross margin, so I think we can get a good sense of the model for the company and where we are heading.

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

Eyal Harari: So, Alex, can you repeat the question, I couldn’t hear you well.

Alexander Henderson: 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 and do we expect it to recover sequentially in the December quarter back to the June quarter level?

Eyal Harari: So, interest rates fluctuated 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 the current level is a good estimation for what we expect in the near future. I think it’s usually due to both the changes in interest rates and some foreign exchange that we are exposed to. And so, most of the –

Alexander Henderson: I’m surprised that interest rates declined, I thought interest rates were going up, but okay, any thoughts on the tax line? Last question for me.

Eyal Harari: Hadar?

Hadar Rahav: Sorry. Can you repeat?

Alexander Henderson: 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?

Hadar Rahav: No, we expect the same level of expense in fourth [ph] quarter in the year 2024.

Alexander Henderson: All right. Thanks. I appreciate your time. And nice, Brent [ph].

Eyal Harari: Thank you Alex.

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