Earnings Call Transcript - RDCM Q3 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference Call for the Third Quarter of 2024. 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. On the call are Hilik Itman, RADCOM's Interim 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. This conference call will contain forward-looking statements. Forward-looking statements in the conference call involve several risks and uncertainties, including, but not limited to, the company's statements about the 5G market and industry trends, sales opportunities, sales cycles and pipeline, the company's market position, cash position, potential and expected growth, profitability and shareholder value, its expectations with respect to research and development and sales and marketing expenses, headcount and gross margins, as well as grants from the Israel Innovation Authority, the company's expectations with respect to its relationships with AT&T, DISH and Rakuten, its expectation to continue enhancing its software solutions and demand for its solutions, deployment of its 5G solutions in multiple cloud environments and the potential benefits to its clients and ability to meet the needs of the market and increase market share, the use of artificial intelligence in its products, potential mergers and acquisitions and its revenue guidance. 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 today's press release 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, financial income 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. Now, I would like to turn the call over to Hilik. Please go ahead.

Hilik Itman, Interim CEO

Thanks, operator. Good morning, everyone, and thank you for joining us for our third quarter 2024 earnings call. Before discussing the third quarter results, I'm excited to welcome Benny on board as our new CEO on December 1st, as you have probably seen in our earlier announcement. Having gotten to know him, I'm confident that he is the right leader for RADCOM and will excel in his role as our CEO. As a seasoned telecom industry veteran with a great record and over 20 years of sales experience with top-tier operators across North America and Japan, I'm sure he will successfully lead the company toward its future success. Benny's residency in the US, where many of our key customers are located, combined with his sales expertise in operators like Sprint, T-Mobile, and SoftBank Mobile, positions him well to drive the company's success into 2025 and beyond. His strong C-level relationships will be invaluable, while his cultural understanding of North American and Japanese markets and his experience in managing large organizations and substantial sales will significantly contribute to our growth strategy. With Benny starting his role as CEO, I will resume my previous role as Chief Operating Officer, focusing more on product development, continuing to lead R&D, participating in sales processes and ensuring customer satisfaction. My goal is to focus on product innovations that drive the company's success aligned with key market trends, address our customers' needs and partner with Benny to ensure RADCOM's continued growth. Now, let me turn to the results. We achieved record quarterly revenues of $15.8 million, and I'm grateful to the RADCOM team for their unwavering dedication and exceptional execution as we propelled the company to new heights by delivering innovative products that meet customer requirements and needs. During the last quarter, we secured a seven-figure multi-year contract with the North American operator for our advanced mobility experience analytics. RADCOM secured this contract after a competitive multi-vendor tender process during which the operator assessed various vendors' RAN capabilities. Our success was fueled by the synergy between our innovative assurance technology and the advanced analytics capabilities from the Continual acquisition, which we have seamlessly integrated into our core technology. Turning to the telecom market. From sales processes and interactions with customers, I see that operators are continuing to invest in their networks and advancing their 5G deployments including 5G standalone. There is a wide customer interest and sales activity for our enhanced RADCOM ACE platform across multiple regions, both among new customers and within our existing install base. The transition to 5G standalone has presented challenges, particularly for operators lacking the necessary skills and knowledge for cloud migration. However, we are witnessing increased maturity with more operators, especially in North America and Europe, moving towards 5G standalone solutions. I am confident that our position as a leading provider of best-in-class cloud-based assurance for 5G will continue to generate positive returns. We see sales opportunities that can lead to additional multi-year contract and increased revenue. Demand for our cloud-based automated assurance and built-in AI capabilities are strong and reflected in our healthy pipeline. Customer feedback is positive as we engage with multiple prospects across various sales cycle stages. While these sales processes can be time-consuming and unpredictable, I believe we are well aligned with operators' needs, helping to address our customers' requirements. By delivering unique value and tackling critical network challenges, we are setting the stage for future business growth. With conversations with customers, I see that in today's telecom landscape, operators seek solutions that reduce costs, drive efficiencies, and allow them to operate with leaner teams. We have invested in AI that enables operators to achieve these cost efficiency goals, answering key market requirements and creating opportunities for us to monetize our investments. By leveraging AI capabilities, we enable operators to identify network issues more rapidly and with less manual intervention. Operators are asking for more automated, intelligent solutions driven by AI technology. Turning to our installed base, AT&T and DISH remain key strategic customers and we believe our business with these operators will remain strong. We know our customer requirements and are attuned to their needs, and we continue to provide new software releases to help them manage their network. In the second quarter, we announced the extension of our close partnership with Rakuten Mobile in Japan. This extension is a testament to the innovative solutions we offer and underscores how we assist the operator in maintaining service quality and driving efficient network operations. Recently, Rakuten Mobile announced that it had reached a milestone of 8 million subscribers in just four-and-a-half years since its full-scale launch as a mobile network operator. We are excited about this milestone and are pleased to contribute to their success by helping them manage their network efficiently and ensuring high-quality services. We achieve high satisfaction levels within our installed base by delivering innovative products that meet customer requirements and needs. This approach drives growth and recurring revenue. We remain committed to ensuring customer satisfaction and continuously enhancing our offering to address the evolving needs of our customers. The focus on innovation ingrained in RADCOM's DNA and our many years of telecom expertise coupled with the integration of our RADCOM ACE platform to telecom operators has enabled us to deliver continued revenue growth and improve our profitability KPIs. We understand the operators' pain points and know how to help them, which is how we approach AI and how we leverage this technology to benefit our customers. GenAI technology continues to evolve and is increasingly used for customer service and support to understand customer experience and intent. RADCOM can provide operators with real value in this area by offering critical insights into customer experience and the network's impact. During the quarter, we released several product enhancements aligned with key 5G technology trends that help address our customers' needs. We announced that a North American operator has selected RADCOM to provide its leading radio access network analysis solution. This includes sophisticated analysis that empowers hundreds of engineers to deliver a superior 5G voice experience by providing precise real-time insights into the RAN network's performance. Our solution also integrates with the operator's service management system to help the teams prioritize and resolve issues more efficiently, significantly reducing workload, cutting costs, and enhancing customer satisfaction. In the quarter, we were recognized in the Best AI/ML Innovation category for the Global Connectivity Award that showcases companies for outstanding achievements and innovations within the telecom sector. To summarize, we have made significant progress in expanding our business and are confident in our ability to continue our growth journey and increase market share by leveraging our healthy sales pipeline. Our best-in-class 5G assurance platform integrated with advanced AI capabilities positions us well to meet the evolving needs of customers in the 5G market. We remain confident in achieving a fifth consecutive year of revenue growth and increased profitability. This confidence enables us to raise our 2024 revenue guidance to $59 million to $62 million. With the appointment of our new CEO, Benny Eppstein, I look forward to partnering with him to accelerate revenue growth, enhance profitability and increase shareholder value into 2025. My focus will be on driving product innovations that fuel the company's success, aligning with the market trends and customer requirements. 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, CFO

Thank you, Hilik, and everyone for joining us today. Now that Hilik has taken you through a few of the third quarter highlights, let me take you through some financial details. While the slides contain GAAP and non-GAAP results to review our financial performance, I will mainly refer to non-GAAP numbers, excluding stock-based compensation, acquisition-related expenses, and amortization of intangible assets related to acquisition. As Hilik mentioned, the successful acquisition of Continual in May 2023 enabled us to secure a seven-figure multi-year contract this quarter with a North American operator. This acquisition has been successful as we integrated Continual's core technology to enhance our solution portfolio and assimilated the team into the company, contributing to our revenues and helping generate pipeline opportunities for RADCOM. Just as the incorporation of GenAI into our solutions is done, integrating continuous technology opens new sales opportunities for the RADCOM ACE platform. Customers often are initially drawn to our innovations and subsequently appreciate the comprehensive value our offerings provide. Looking ahead to future mergers and acquisitions, the acquisition of Continual has reinforced our confidence in executing additional transactions. We have been open to pursuing further acquisitions for several years, and we continue to seek opportunities that expand our solution portfolio, enhance customer value and deliver greater returns to our shareholders. With adequate cash reserves at our disposal, we are ready to act on promising opportunities. However, we will adopt a measured and strategic approach to ensure alignment and value creation. Now, please turn to Slide 5 for the financial highlights. Third quarter revenue grew by 20%, reaching a new record of $15.8 million. Non-GAAP net income for the third quarter was $3.7 million and the non-GAAP net margin was 24%, which grew by 6% compared to the third quarter of 2023. GAAP net income was $2.3 million, up from a net loss of $0.3 million compared to the third quarter of 2023. In the third quarter of 2024, our non-GAAP gross margin was 75%. Note that our gross margin can vary slightly from quarter to quarter depending on the revenue mix. We expect that the fourth quarter will remain at a similar level. On a non-GAAP basis, our gross R&D expenses for the third quarter of 2024 were $4.2 million, with no significant change from the third quarter of 2023. In the fourth quarter, as we support the increasing revenue from top-tier operators, we expect a gradual increase of R&D expenses as we continue investing in our innovative solutions with AI and automation, ensuring customer satisfaction as we enhance our offerings to address the evolving needs of our customers. During the quarter, we received a grant of $182,000 from the Israel Innovation Authority, which increased by 75% compared to the third quarter of 2023. We expect the grant to be approximately $100,000 in Q4. In the third quarter of 2024, sales and marketing expenses reached $4 million on a non-GAAP basis, an increase of 19% compared to the third quarter of 2023. In the following quarters, we expect a gradual increase in sales and marketing expenses to support an increasing pipeline of opportunities. G&A expenses for the third quarter of 2024 were $1.3 million on a non-GAAP basis, an increase of $298,000 from the third quarter of 2023. Turning to the company's profitability. Thanks to higher revenues and careful expense management, operating profit on a non-GAAP basis reached $2.6 million, growing by 92% or $1.3 million from the third quarter of 2023. Our non-GAAP operating margin was 17%, growing by 7% compared to the third quarter of 2023. Net income on a non-GAAP basis was $3.7 million, growing approximately 55% by more than $1.3 million compared to the third quarter of 2023. Diluted EPS for the quarter was $0.23, growing by $0.08 from the third quarter of 2023. As shown in Slide 7, our GAAP net income for the third quarter of 2024 was $2.3 million. Diluted EPS was $0.14 compared to a loss of $0.02 from the third quarter of 2023. Turning to the balance sheet. As shown on Slide 11, we continue generating cash and ended the second quarter with $90.2 million in cash, cash equivalents and short-term bank deposits. Our headcount was 313 at the end of the third quarter of 2024. We expect our headcount to remain similar in the fourth quarter. That ends our prepared remarks. I will now turn the call back to the operator for your questions.

Unidentified Analyst, Analyst

Hello. Hi, guys. Thank you, and congrats on a strong quarter here. Can I start with the new seven-figure deal with the North American operator? If I'm understanding correctly, it sounds like Continual was a big contributor to the win. And is it fair to say that they're mostly using Continual capabilities today? And if so, just how do you think about the expansion path for that customer from here to get them to broader platform adoption over time?

Hilik Itman, Interim CEO

Yes. Hi. So actually, the Continual acquisition is something that is complementary to our platform. It's not something that we add to our portfolio and offering to increase the ability of customers to gain more advanced and sophisticated insight from the network, but actually from our data. The data that the ACE platform produces actually matches between the two platforms. If I'm looking forward, I think that it will contribute significantly for new opportunities and new logos because of the matching between the two platforms. So, this is the main plan for Continual.

Unidentified Analyst, Analyst

Okay. Understood. So, it sounds like they're using both. And then, can you just maybe to follow up on that, what does the expansion path look like for that customer? Is there more room to go beyond where they are now? Is it a typical ramp in the contract or is there anything special that we should know about the structure of that deal?

Hadar Rahav, CFO

Yes, of course. So, this is a multi-year contract. We will start recognizing revenues in 2025. As we mentioned in the call, it's about a seven-figure contract, which includes an annual license. Upon the delivery and acceptance, we will start to recognize revenue.

Unidentified Analyst, Analyst

Okay, thanks, Hadar. I wanted to follow up on something else. I noticed you signed several new deals this year, and for many of them, revenue recognition won't begin until 2025. Could you help us understand how to evaluate 2025's growth potential, considering your implied guidance is around 10% for the fourth quarter? Would that be a reasonable starting point, or are there other factors we should consider for 2025 revenue?

Hadar Rahav, CFO

Okay. So, we expect to continue to grow our business over time, so you should expect a continuation of our operating profit growth over time. Yes, we're really pleased with how we have been performing, and I believe that it's one that we can sustain. We continue to seek organic and inorganic opportunities that expand our solution portfolio and drive additional growth. We have a business model which I think is incredibly powerful. Most of our contracts are multi-year contracts, and about 70% of our revenue comes from recurring revenue. So, you understand that we have a healthy backlog, and this puts us in a solid position heading into the fourth quarter and 2025. Yes, I'm really and truly confident that we can deliver additional revenue growth, and we may increase our operating expenses to support this revenue growth, but excluding any foreign exchange impact, we believe that we will sustain our current profitability. So, your assumption is definitely reasonable.

Unidentified Analyst, Analyst

All right. Perfect. Thank you very much.

Hilik Itman, Interim CEO

Thank you.

Hadar Rahav, CFO

You're welcome.

Operator, Operator

Thank you. The next question is from Ryan Koontz of Needham & Company. Please go ahead.

Ryan Koontz, Analyst

Yeah, thanks for the question. Hoping you can maybe step back a bit and maybe speak to the different geographies and the state of each of the kind of continental geographies as it relates to your sell-in opportunity. Maybe there are still limited deployments of 5G or maybe some of them are more advanced deployments of 5G, but they're still standing up their 5G standalone cores, I assume, in some of the places like North America. But if you could just maybe characterize the different geographies, that would be helpful for understanding the opportunity at hand. Thank you.

Hilik Itman, Interim CEO

Okay. So, as you said, our main focus geographically is North America and also Europe. We definitely see progress with the 5G standalone and migration to cloud technologies. By the way, we see now migration for different kinds of cloud platforms. Part of that is public, part of that is private, and we still see and continue to see that our platform is very well positioned to this trend. All the investments that we are making in AI, GenAI, and the example of Continual is a great case for our investments in analytics that provide us to be much more attractive now in addition to the core technology of RADCOM in assurance, especially in cloud, but the combination with the analytics capabilities for RAN experience is well positioned now for these areas. However, we see few opportunities in other regions as well, but for sure, in North America and Europe, it's more advanced in terms of 5G transition.

Ryan Koontz, Analyst

Got it. And is most of the demand coming from voice over new radio, so voice over 5G, or is it primarily still for data applications where you're seeing the most interest?

Hilik Itman, Interim CEO

I believe the strongest interest is in voice over new radio because the demand for our tools is particularly critical during these transitions. We are also observing interest in data, but voice over new radio, as a new service and technology, is positioning us effectively.

Ryan Koontz, Analyst

Got it. And you think you'll see some voice over new radio deployments in '25?

Hilik Itman, Interim CEO

Yeah.

Ryan Koontz, Analyst

Got it. Great. That's all questions I have. Thank you.

Hilik Itman, Interim CEO

Thank you.

Operator, Operator

This concludes the RADCOM Ltd. Third quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.