Radcom Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference Call for the First Quarter of 2022. All participants are at 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. 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 2022 revenue guidance, continued investment in research and development, its leadership in the 5G assurance market and the potential increase in market share and ability to continue to drive positive returns, its expectation to gain further interest from operators and play an important role in facilitating the transition to 5G, its expectations about its pipeline and momentum, further demand for our products and growth, the potential for additional multiyear contracts, engagements, and expansion of opportunities, the company's expectations with respect to its relationship with Rakuten and AT&T, and the expected benefits of its in-person events starting to resume 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 be referring 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 operational 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. I would now like to turn it over to Eyal. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us for our first quarter 2022 earnings call. You may have seen earlier today, we announced that DISH selected RADCOM to monitor the new 5G cloud network. This exciting news continues the positive momentum since the start of 2022. This is the second new 5G customer win that brings us to a total of $50 million in new contracts this year. Our first quarter was another quarter of solid revenue growth, while at the same time we significantly improved our bottom line. Revenue grew 16% year-over-year for the first quarter, reaching $10.6 million. This is our 11th straight quarter of revenue growth year-over-year, and I am very pleased with our results. As mentioned, DISH selected RADCOM to monitor America's first 5G smart network. This wireless provider announced a few years ago that they plan to deploy a 5G network capable of serving 70% of the U.S. population by June 2023. DISH started this nationwide rollout at the beginning of the month by launching first in Las Vegas. DISH announced in their recent earnings call that they expect to launch in about 25 markets by June. We feel proud to be DISH's assurance partner as they begin to roll out America's first 5G smart network. DISH selected RADCOM because they wanted the best-in-class assurance solution that seamlessly integrates into the cloud. With RADCOM ACE, we monitor their stand-alone 5G network, the first fully deployed on a public cloud. Our cloud technology will run on Amazon Web Services, AWS, and now DISH can launch 5G smoothly and monitor the service quality across its nationwide rollout. Last month, we announced a multiyear 5G assurance contract win with a mobile network in Europe. This new order covers assurance for this European operator's 5G network. RADCOM ACE will enable the operator to monitor its end-to-end 5G network performance and provide end-to-end visibility that helps the operator make real-time, data-driven decisions and proactively improve network performance, ensuring top-quality services are delivered to its customers. These wins were achieved based on our innovative cloud technology and the advanced capabilities of RADCOM ACE, which provides an intelligent automated assurance platform built for the cloud and 5G. We believe this strengthens our position as a 5G assurance provider and is an important acknowledgment of our leadership in this market. Therefore, we expect RADCOM ACE to gain further interest from operators and play an efficient role in facilitating the transition to 5G. With these two new customers and previous wins, our 5G strategy is paying off. At the same time, we remain focused on capturing the growth potential we see in our current sales pipeline with both new and existing customers. We also see good momentum for the 5G market in the mid and long term and believe it will be a catalyst for growth as the market ramps up, creating more sales engagements that can bring additional multiyear contracts and increased market share. So we believe that our 5G strategy provides us with the foundation for future revenue growth beyond our current sales engagements. With the market evolving rapidly, our continued investment in research and development to extend our technological leadership within this space is vital. We believe this to be a key enabler for our future business. We will continue to invest strategically in R&D to enhance our RADCOM ACE solution, increase our 5G capabilities, expand our AI-driven insights and seamlessly integrate our solution into the cloud. All these capabilities are aligned with market needs and have already begun to bear fruit, as noted with our recent wins. Our pipeline continues to be healthy and expand, while having a good mix of opportunities from our current installed base and new customers. We also see positive momentum with a number of engagements, and the level of engagement and our pipeline's total addressable market size. We believe that our position as a best-in-class assurance provider for cloud-native 5G networks and our cloud expertise and knowledge will continue to drive positive returns. The bottom line is that the demand looks strong, and we have a solid pipeline of opportunities that has the potential to increase our market share. Turning to the installed base. Last month, we announced that AT&T renewed its multiyear assurance contract with RADCOM, as we entered our sixth year of partnership with this leading telecom operator. With this contract, we have a significant backlog that provides good visibility into 2022, and we expect our business with AT&T to remain strong as we continue our partnership. AT&T mentioned in their recent earnings call that their Net Promoter Scores are up year-over-year. In addition, they are experiencing historically low churn levels, which they attribute to the improvements in customer experience. We believe that assurance solutions are vital for monitoring service quality and ensuring a good customer experience. Therefore, we continue delivering cutting-edge software releases as we support the evolution of their network and monitor their customer experience as they continue evolving their underlying network infrastructure to the cloud. Rakuten Mobile achieved a very high score in a newly published report for network performance in Tokyo compared to other cosmopolitan cities worldwide. This report demonstrates that Rakuten Mobile has deployed a high-performing quality network in Japan at lightning speed using the latest cutting-edge technology that competes with leading operators globally. Rakuten has stated the importance of our solution in supporting their journey as they build the world's first virtualized network. Our solution provides end-to-end service and subscriber visibility in a cloud-native environment and is vital to help them ensure network performance and automate their network operations. We are delighted with the progress in our partnership with Rakuten. We continue to develop our solution using the latest cloud-based deployment processes to provide state-of-the-art software releases as their network evolves. We believe this work will continue helping our products mature and provide valuable experience when more operators implement stand-alone 5G and look to our 5G stand-alone assurance expertise. In February, our sales team attended the Mobile World Congress in Barcelona, Spain, the leading telecom industry event. The event was held in person after a couple of years due to COVID limitations. As we covered in a recent blog post summarizing the Congress, we saw evidence that real-time analysis through automated assurance will be vital for 5G network operations. Operators need to make their networks more intelligent, dynamic, and autonomous to deliver quality 5G services. Strong themes at the Congress were the transition to 5G stand-alone, cloud-based networks, public cloud providers, and Rakuten Symphony. All these are areas of interest for RADCOM, and inquiries about our solutions were very positive, which we believe will lead to additional sales opportunities. Similar to the Mobile World Congress returning, we see that in-person industry events in general are starting to resume. After two years of being online events in the U.S., the big 5G event, the leading industry conference in North America is back to an in-person event. We see this happening globally, which is a positive sign, as we believe that in-person meetings are starting to resume. As a result, we will be able to generate more sales opportunities and advance our current engagements. We believe the 5G market remains strong while still only being at the early stages. We see that the direction and momentum of our market are very positive and aligned with our strategy. The complexity of these new 5G network architectures requires automated assurance solutions to isolate network issues, optimize performance, and provide a cornerstone for building networks with extensive automation. We also hear this from our customers. To summarize, I'm incredibly pleased with our performance at the start of fiscal year 2022. Revenues are up year-over-year, and we improved our bottom line. In addition, we continue to receive industry-wide recognition from telecom operators rolling out advanced cloud-based 5G networks and looking for forward-looking assurance solutions to aid their 5G transformation. We are excited to win several new noteworthy multiyear assurance contracts. We were selected by DISH as their assurance vendor to monitor America's first 5G smart network and added another new customer in Europe for an additional 5G assurance contract. We look forward to providing our advanced cloud-native software to help ensure great mobile experiences for more subscribers. Our cloud and 5G assurance expertise continue to expand from multiple customer deployments, which we believe will become a key differentiator as the market gains momentum. We are helping operators make data-driven decisions in real-time by transitioning to software-based, more intelligent, and more automated networks. I am confident in our future success and the business strategy we are pursuing with our innovative cloud-native offering and the role we expect to play in the 5G transformation. Based on our recent wins that provide greater visibility and our healthy pipeline of opportunities, we are optimistic about our ability to deliver growth above our initial revenue guidance provided in February. Therefore, we are increasing our fiscal 2022 revenue guidance from a range of $42 million to $45 million to a range of $43 million to $47 million. With that, I would like to turn the call over to Hadar Rahav, our CFO, who will discuss the financial results in detail.

Thank you, Eyal, and good morning, everyone. Now please turn to Slide 8 for our financial highlights. To help you understand the results, I will refer mainly to non-GAAP numbers, which exclude share-based compensation. We ended the first quarter of 2022 with $10.6 million in revenue, increasing from $9.1 million in the first quarter of 2021. We are pleased with our consistent growth trend representing an 11th consecutive quarter of year-over-year growth. Our gross margin in the first quarter of 2022 on a non-GAAP basis was 74%. Please note that our gross margin can fluctuate depending on the revenue mix. Our gross R&D expenses for the first quarter of 2022 on a non-GAAP basis were $4.9 million, a slight increase of $113,000 compared to the first quarter of 2021. We received a grant of $218,000 from the Israel Innovation Authority during the quarter compared to a grant of $68,000 in the first quarter of last year. As a result, our net R&D expenses for the first quarter of 2022 on a non-GAAP basis were $4.7 million compared to $4.8 million in the first quarter of 2021. We expect the Israel Innovation Authority grant in the second quarter to be at a similar level as in the first quarter. Sales and marketing expenses for the first quarter of 2022 were $2.6 million on a non-GAAP basis, increasing $227,000 compared to the first quarter of 2021. G&A expenses for the first quarter of 2022 on a non-GAAP basis were $825,000 with no significant change from the first quarter of 2021. Operating loss on a non-GAAP basis for the first quarter of 2022 was $274,000 compared to an operating loss of $1,130,000 for the first quarter of 2021. Net income for the first quarter of 2022 on a non-GAAP basis was $614,000 or a net income of $0.04 per diluted share compared to a net loss of $1,030,000 or a net loss of $0.07 per diluted share for the first quarter of 2021. The positive net income was due to financial income derived from interest and fluctuations in foreign exchange. On a GAAP basis, as you can see on Slide 7, our net loss for the first quarter of 2022 was $0.6 million or a net loss of $0.04 per diluted share compared to a net loss of $1.7 million or a net loss of $0.12 per diluted share for the first quarter of 2021. At the end of the first quarter of 2022, our hedge fund was $286 million. Turning to the balance sheet. As you can see on Slide 11, our cash, cash equivalents, and short-term bank deposits as of March 31, 2022, were $70.9 million. That concludes our prepared remarks. I will now turn the call back to the operator for your questions.

Thank you. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. The first question is from Arjun Bhatia of William Blair. Please go ahead.

Perfect. Thank you very much for taking my questions. And congrats on the DISH win. Maybe I'll just start there. With the subscription model, can you just give us a sense of the timing of how that deal may layer into the model over time? Is that something that can be fully ramped this year, sometime, maybe Q3, Q4? And then how do you think about the future expansion opportunity you have with DISH as the rollout proceeds? Is there room for further expansion there?

Hi, good morning. So yeah, DISH, we are very excited about our new announcement regarding the agreement with DISH Wireless. Our business model with other accounts is a multiyear subscription-like concept that we are expecting revenue to span multiple years. The win is recent and typically takes one or two quarters until revenue starts. So we expect revenue to start in the second part of the year, while most of the revenue will come in the following years, and we will reach full capacity as we evolve. DISH, as you're probably aware, is building a new 5G network, and we covered this multiyear term in our agreement, but we are definitely looking forward to further expansion with them into additional areas as they grow. As they just announced this week in Las Vegas, they are looking to go nationwide and capture millions of subscribers. So it's definitely a very exciting time for us.

Perfect. That's very helpful. And then if I can just ask on the product side. Can you touch a little bit, not just with DISH, but overall in terms of the pipeline you're seeing? What role is AI and predictive analytics playing in driving pipeline and new business? Obviously, that's a big value proposition for these network operators where they want to predict an outage before it occurs and they want to get better visibility into their networks. Is that a major part of the conversations that you're having with customers? And how has that dynamic and the conversation changed over the last year or so?

Actually, this is a great question. In the last two years, we were very busy building the infrastructure and, I would call it, the basic capabilities to have the best solution to monitor 5G networks. Last year, we announced our RADCOM ACE AI capabilities, which address how we can do more predictive and automated analytics and generate insights from the network. This is actually becoming our secret sauce. In many cases, we see more and more interest from customers in not only how they can monitor and assure their network, but really how they can use these advanced technologies to become more efficient, enhance their automation, and gain more from the data collected by the assurance solution. So definitely, this is a significant topic that is being discussed. It's something that has captured a lot of interest, and I see more demand for this technology as we go forward. This is part of the area we are going to continue to invest in as part of our R&D efforts.

Great. And last one for me. You mentioned Mobile World Congress in Barcelona. Just with the traction that you're seeing in the pipeline with reopening and travel expenses returning, how do you think about the change or the increase in operating expenses as we get back to in-person events and your salespeople start going out and having in-person meetings? Again, should we expect the second half of the year to ramp up as travel comes back? Or is that – I assume that’s baked into guidance, but would just love to hear how you're thinking about that as the year progresses here.

Yeah. So first of all, we are very excited to see that the industry is starting to get back to on-site engagements. Some of the effects are already being seen as we resumed some of our travel and on-site engagements in the last quarter and even in the previous quarter. We expect to see a slight increase in our sales and marketing due to these on-site events. But we are all eager to meet our customers. I believe this will enhance our ability to close new business, mainly as RADCOM is targeting to land and expand into new accounts. This definitely will help us gain more confidence with more customers. Overall, we are very happy about this new trend. And hopefully, with COVID, you never know, but we hope that this will continue throughout '22. So a slight increase, but not something dramatic. However, yes, some of the expenses are going to be higher as travel costs increase.

Perfect. Yeah, I think we're all for that return to in-person events and seeing everybody in person. Thanks for taking the questions. Congrats, again.

Thank you.

There are no further questions at this time. This concludes the RADCOM Ltd. first quarter '22 results conference call. Thank you for your participation. You may go ahead and disconnect.