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. As a reminder, this conference is being recorded and will be available for replay on the Company's website 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. 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, and the effects of the war in Israel. 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 results of operations consistently from period to period.

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. Our hearts are with them, and we hope they will come home safely. We empathize with every individual impacted and strongly condemn the acts of violence that have occurred. 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. Our global support centers are 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. 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. We continue to work within the 5G cloud ecosystem, offering potential customers integration with all three leading public cloud providers: Amazon Web Services, Microsoft Azure, and Google Cloud. Our team is already working hard on embedding Gen AI technology into our solutions. We hope to share some of these exciting updates in the fourth quarter. 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 clients. Therefore, we reiterate 2023 revenue guidance of $50 million to $53 million.

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. 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. 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 efficiency. Our gross margin on a non-GAAP basis in the third quarter of 2023 was 75%, and we expect that the fourth quarter will remain at a similar level. Sales and marketing expenses for the third quarter of 2023 were $3.4 million, an increase of $524,000 compared to the third quarter of 2022. G&A expenses for the third quarter of 2023 were $962,000, 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 million for the third quarter of 2022. Our net income for the third quarter of 2023 was $2.4 million or a net income of $0.15 per diluted share. On a GAAP basis, our net loss for the third quarter of 2023 was $0.3 million or a net loss of $0.02 per diluted share. This quarter, we recognized stock-based compensation expenses of $2.5 million, primarily due to the change in a forfeiture rate estimation. At the end of the third quarter of 2023, our headcount was $301. We expect our headcount to rise slightly in the fourth quarter.

Ladies and Gentlemen, at this time, we will begin the question and answer session. The first question is from Arjun Bhatia of William Blair. Please go ahead.

Hi. It's a question for Arjun. Just a couple of questions for you guys. You talked about overall the direction being clear in the market and that the 5G rollout is here. But can you discuss how the pace is varying depending on the different sides and locations?

Good morning. 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. We see that our net income about triples both for this quarter and when looking at the nine months. We are optimistic about the development of 5G as operators see this strategically. While there are some operators proceeding slowly, many more are now investing in 5G. So it remains a matter of timing. The encouraging part for us is that we are managing to grow and consistently improve our performance.

Thanks for the color on that. You mentioned you're working on embedding more AI solutions across the platform, with announcements coming next quarter. Could you discuss the general priorities and what customers are asking for?

RADCOM has invested in AI in the last three years, as we believe that our cloud platform can gain more value from the assurance platform we've built. Operators are primarily looking for ways to reduce costs and improve efficiencies, which is only achievable by replacing manual labor with automation. Therefore, much of our AI focus is on increasing operator efficiency through automation processes that improve the network and ultimately enhance customer experience. Many data sets are collected from the network through our monitoring capabilities, and we leverage AI technology to analyze them in real-time.

Perfect. That's it for me. Thank you, and congrats again on the quarter.

Thank you.

Eyal and team, I just wanted to express my thoughts regarding the horrific terrorist attack on your country. 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 in the fourth quarter, which is quite a bit higher than recent quarters. Can you talk about what in the mix is causing that and whether we should see that persist into 2024?

As we mentioned before, we see our gross margin trending to improve as our revenue increases. We are creating efficiencies that allow us to improve our margins, and as a software company, this allows us to be profitable with incremental revenue. While there might be some fluctuations quarter by quarter, we are aiming for margins in the 70-75% range as revenue continues to grow. The trend suggests improvements in profitability.

It's logical then to think we'll have a 74% margin this year. Is it reasonable to expect at least 74% in 2024?

It's hard to estimate exactly as fluctuations are expected, but based on past performance, we are trending toward that.

Could you remind us what percentage of your cost structure is shekel based and what portion is outside of Israel? With the shekel weakness, it sets up for a good comparison on OpEx.

About 40% of our employees are based in Israel, and around 60% of our costs are shekel based. Most of these employees are high-paid.

Have you done any hedging or are you exposed to that?

Most of our cash is in U.S. dollars. We have done short hedging in the past when required, but currently, we mainly leverage the shekel weakness, which benefits our profitability.

With the given guidance, is there any reason to expect more than 4% to 5% growth in OpEx? Given the shekel level, it seems like a good offset.

We are still building our work for 2024. If I look strategically, we keep our R&D at similar levels and incrementally increase sales and marketing to capture opportunities. All signs are pointing to trends being consistent, including revenue growth, profitability, and gross margin.

Could you explain the decline in interest income quarter-over-quarter given rising rates and cash balances?

Interest rates fluctuated a bit and they were lower in the previous quarter. There were also changes in net income due to foreign exchange exposure. Overall, the current income level seems stable for the near future.

Any change in tax expectations going forward?

No, we expect the same level of expense in the fourth quarter and throughout 2024.

Thank you, I appreciate your time.

Thank you, Alex.

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