RADCOM Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Radcom Limited Results Conference Call for the 2nd 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 On the call are, Helik Itmann, Radcom's Interim CEO and Hadarah Radcom's CFO.

Operator

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 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 5 gs and launches, demand for the company's products and services, sales opportunities, sales cycles and pipeline, momentum, maintaining and increasing profitability and growth, its ability to provide value to customers and shareholders, the company's expected growth, its expectations with respect to expenses and headcount, as well as grants from Israel Innovation Authority, the company's expectations with respect to its relationships with its customers, the potential of the the the company's revenue guidance and the search for a permanent Chief Executive Officer. The company does not undertake to update forward looking statements.

Operator

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, including in the quarter's earnings release available on our website.

Operator

Now I would like to turn over the call to Helik. Please go ahead.

Speaker 1

Thanks, operator. Good morning, everyone, and thank you for joining us for our Q2 2024 earnings call. Before I'm diving into our results, I want to provide an update on the CEO search process. The Board has engaged a top recruitment firm and established a committee to appoint the next CEO. Significant progress has been made and the committee is now in the advanced stage of candidate selection.

Speaker 1

The committee has evaluated candidates from Israel and abroad, especially the U. S. With the necessary leadership qualities and experience to drive Radcom's next phase of growth and success. I am fully confident in the I will continue focusing on R and D, product innovation and customer success. Then I will be able to invest more time in driving innovation and taking the company to the next level of growth journey alongside a new CEO.

Speaker 1

Now turning to the results. I'm excited to share our strong performance and execution in this quarter. Our results highlighted the benefit of our customers' trust and our ability to deliver value to our carrier grade and innovative solutions. We achieved solid growth momentum in both our top and bottom lines. We reached record quarterly revenues of $14,800,000 up 20% from the Q2 of 2023.

Speaker 1

We generate a positive cash flow, achieving a new record of $86,100,000 in cash, cash equivalents and bank deposits. We achieved record half year revenue and profitability for the 1st 6 months of 2024. Since the start of the we have secured over $50,000,000 in new contracts including several 7 digit contracts across various geographic markets while maintaining significant recurring revenues. This shows the demand for our leading solutions and boost our revenues as operators transition to 5 gs. Our entire organization remains committed to delivering profitable growth, increasing our market share and driving ongoing technology innovation as we look to provide long term value to our customers and shareholders.

Speaker 1

Turning to the telecom market. Customer interest and sell activities are noticeably increasing in the U. S. And other regions. This upturn is evident in the number of opportunities our teams are currently pursuing and the 5 gs tenders issued by operators.

Speaker 1

Cell activities. In this role, I provide executive level support for our sales efforts and spirit future innovations. They've heightened interest in automated assurance and intelligence analytics to several key factors. First, most U. S.

Speaker 1

Operators are progressing in their transition to 5 gs standalone networks requiring the adoption of cloud based automated assurance and intelligence analytics solutions. Additionally, as legacy assurance system age or reach the end of life, operator must replace outdated equipment as part of the natural upgrade cycle. Additionally, some competitors have not developed a cloud native automated assurance and intelligence analytics solution, which requires significant R and D investment, an investment that Radcom has made. This process leads operators to conduct Zara due diligence evaluating the available options in the market to identify new best in class automated assurance and intelligence analytic solutions. Given these market factors, we see significant opportunities to increase our market share in the U.

Speaker 1

S. And other regions, driving sustainable and continuing growth while delivering more value to our shareholders. Turning to the cloud, adapting a cloud architecture is part of operators' transition to more efficient and dynamic software centric networks operations. We continue to see increasing cloud adoption with operators replacing legacy with modern cloud based networks. Our solution help operators manage this transition efficiently and with customer centric focus by gathering all the analytics across the cloud networks.

Speaker 1

In the previous calls, we mentioned the importance of Gen AI and that all the leading public cloud providers or hyperscalers are emerging as having a pivotal role in the GenAI ecosystem. During the Q2, we announced that Radcom NetTalk, our Gen AI application was now available on AWS. Although Gen AI is in the innovation stage, customers see our innovation and thought leadership in this space, which can be a door opener that lead to sales opportunities. As demonstrated in our support for GenAI on AWS and the contract win to offer our solution as a SaaS in the U. S, we continue engaging with operators and the cloud based ecosystem.

Speaker 1

As a reminder, we offer potential customer integration with all the leading public cloud providers, Amazon Web Services, Microsoft Azure and Google Cloud. And we believe our integration into cloud providers will help generate additional opportunities. Turning to the pipeline, we see positive market momentum that can drive growth, increase sales engagement and lead to additional multiyear contract. The more robust demand for cloud based automated assurance and intelligence analytics technology is reflected in our increased pipeline as we engage with multiple prospects across various sales cycle stages. While this sales process can take time and are unpredictable, we believe our solution aligns with operators' needs, drive unique value and address critical network challenges.

Speaker 1

This set the stage for future business growth. In today's telecom microeconomic landscape, operators seek solutions that help them reduce significant cost while ensuring transition to 5 gs cloud network infrastructure and technologies. These are essential use cases for assurance and network analytics. This presents a significant opportunity for Radcom and we believe our position as an innovative automated assurance and intelligence provider will continue to drive positive returns. Turning to our installed base.

Speaker 1

AT and T and Dish remains key strategic customers and we believe our business with these operators will remain strong. We continue to provide software enhancements and new releases to help them manage their network. In the Q2, we were selected to provide a SaaS service assurance solution on AWS in the U. S. For an existing customer.

Speaker 1

Deploying Radcom ace on AWS will enable this operator to achieve high level of automation and flexibility when using their automated assurance and intelligence analytics solution to gain real time insight and analytic into the network. This allows the operator to adapt quickly to network capacity changes ensuring excellent customer experience and delivering top quality services. We also announced that our collaboration with Rakuten Mobile in Japan has been extended to our strong long term performance and support. So business with Rakuten Mobile remains robust following the renewal of our multiyear contract. We have achieved high satisfaction level within our installed base by offering a robust and innovative product and focusing on customer requirements and needs driving growth and recurring revenue.

Speaker 1

We continue to invest in sales and marketing to capitalize on the rising demand on our solutions. We have expanded our sales team to seize these opportunities by recognizing significant growth potential in our pipeline. We expanded our sales channels during the quarter, particularly in Europe and South America by strengthening our partnership with local agencies and distributors. This approach allows us to address potential sales activities and effectively meet growing demand. Our combined indirect and direct sales teams ensure an increased presence on the ground from a sales perspective.

Speaker 1

We are also actively participating in numerous industry events worldwide, where the sales team's engagement creates interest in our automated and intelligence analytics. Our executive team frequently speaks at this event, further enhancing interest in our solution and solidifying our thought leadership in the 5 gs assurance and analytics space. This interaction has led to many promising discussions, including significant interest in our new generative AI applications, which could translate into future sales opportunities. We believe we have a differentiated solution aligned with key market trends and are well positioned to address telecom operators' needs. We continue to enhance our software with additional automation, intelligence and early based capabilities to add value and expand our customer use cases.

Speaker 1

We announced generative AI application support for AWS, so operators can roll out new services faster on AWS while improving operational efficiencies using Radcom Ace enhanced by generative AI. Radcom is a company with many years of expertise in telco space. We know how to analyze data and deliver valuable insight to the telecom operators. So we approach all our product innovation from this unique perspective starting from a foundation of a good data and telco domain knowledge. We will continue creating value for our customers and shareholders by building upon our strategic position as the leading automated assurance and intelligence analytic platform for 5 gs and the cloud.

Speaker 1

Innovating technologies empower our solution through significant product investment made over the year. We continue investing in R and D because we believe it is a critical enabler for future business. We serve as operator of Smart Copilot to help navigate in 5 gs network complexity. This means continually evolving our automated assurance and intelligence analytics solution, adding new AI powered capabilities and use cases to maintain our 5 gs assurance leadership. I'm excited to announce that the company received industry recognition.

Speaker 1

We were recently named finalists for the 2024 Leading Light Award. This telecom focused program recognized the industry top company's achievements in the next generation communication technology and innovation during the year. To summarize, our strong results demonstrate that our team is executing effectively. Our performance in the 2nd quarter and the consistent achievement across multiple quarters position us for a successful 2024. Our business strategy had positive outcomes.

Speaker 1

As evidenced by our profitable growth and consistent positive cash flow, our momentum remains strong and we believe the best is yet to come as we aim to elevate the company's evolution and enhance shareholder value. We are experiencing increasing demand for our innovative assurance and analytics solutions across multiple regions. This growing interest is evident in our expanding sales pipeline, which has the potential to drive future growth. Our R and D team is continuously innovating and supporting our customers' needs. Therefore, we remain confident we can deliver a 5th consecutive year of revenue growth and increased profitability.

Speaker 1

This gives us the confidence to raise our 2024 revenue guidance to a range of $58,000,000 to $61,000,000 up from the previous range of $57,000,000 to 60,000,000 With that, I would like to turn the call over to Azar Rav, our CFO, who will discuss the financial results in detail.

Speaker 2

Thank you, Lucielec, and everyone for joining us today. Now let's turn to the results. 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 acquisitions. As noted earlier in the call, since the beginning of the year, we have secured over $50,000,000 in new contracts, including several 7 digit contracts across various geographic markets. Most of these revenues will be recognized in 2025 and beyond.

Speaker 2

This influx of contracts underscores the robust demand for our leading solutions and positions us well to capitalize on the industry transition to 5 gs, significantly boosting our revenue. Now please turn to Slide 5 for the financial highlights. 2nd quarter revenue grew by 20%, reaching a new record of $14,800,000 Our positive start to the year is driven by strong team execution, which has led to good financial performance, revenue and profitable growth and measurable improvements to our bottom line. Non GAAP net income for the 2nd quarter was $3,100,000 and the non GAAP net margin was 21%, which grew by 4% compared to the Q2 of 2023. GAAP net income for the 2nd quarter doubled to $1,700,000 and EPS was up by 120% compared to the Q2 of 2023.

Speaker 2

Our gross margin on a non GAAP basis in the Q2 of 2024 grew to 75%. Note that our gross margin can vary slightly from quarter to quarter depending on the revenue mix. We expect that the 3rd quarter will remain at a similar level. Regarding R and D investment, the company's strategy is to continue investing at a similar level as in 2023 to expand our AI driving insights and seamlessly integrate our solution into cloud. Our investment in research and development is vital to extending our technological leadership.

Speaker 2

This is a key enabler for our future business. We believe that R and D as a percentage of revenue will decrease along with revenue increase. On a non GAAP basis, our gross R and D expenses for the Q2 of 2024 were $4,100,000 Excluding any impact from exchange rates, we expect that our R and D expenses will remain similar in the next quarter. During the quarter, we received the grant of $180,000 from the Israel Innovation Authority, the same as in 2023. We expect the Israel Innovation Authority grant to remain at a similar level in the Q3.

Speaker 2

As Hlilik mentioned, the transition to 5 gs presents attractive growth opportunities. We are excited about this potential and will continue to invest incrementally in sales and marketing, mainly by expanding the global sales team. Additionally, in the last quarter, we expanded our sales channels by partnering with new local agents and distributors and allowing us to capture more opportunities. In the Q2 of 2024, sales and marketing expenses reached $3,800,000 on a non GAAP basis, an increase of 27% compared to the Q2 of 2023. In the following quarters, we expect a gradual increase in sales and marketing expenses to support an increasing pipeline of opportunities.

Speaker 2

G and A expenses for the Q2 of 2024 were $1,200,000 on a non GAAP basis, an increase of $230,000 from the Q2 of 2023. This increase was mainly due to special expenses incurred for the CEO search. Turning to the company's profitability. Due to higher revenues and careful expenses management, operating profit on a non GAAP basis reached $2,300,000 growing by 100 and 70% or $1,400,000 from the Q2 of 2023. Our non GAAP operating margin was 15.4%, doubling our operating margin in the Q2 of 20 23.

Speaker 2

Net income on a non GAAP basis was $3,100,000 growing approximately 50% by more than $1,000,000 compared to the Q2 of 2023. Diluted EPS for the 2nd quarter was $0.20 growing $0.07 from the Q2 of 2023. As shown in Slide 7, our GAAP net income for the Q2 of 2024 was $1,700,000 Diluted EPS was $0.11 growing 0 point 0 $6 from the Q2 of 2023. Turning to the balance sheet. As shown on Slide 11, we continued generating cash and ended the 2nd quarter with 86,100,000 dollars in cash, cash equivalents and short term bank deposits.

Speaker 2

Our headcount was 307 in the end of the Q2 of 2024. We expect our ad count to remain similar the Q3. That ends our prepared remarks. I will now turn the call back to the operator for your questions.

Speaker 3

Thank

Operator

The first question is from Batya Rosen of William Blair. Please go ahead.

Speaker 4

Yes. Hey, guys. It's Arjun here. Congrats on the momentum and the strong execution here. It sounds like you're getting some pretty good adoption from 5 gs contracts.

Speaker 4

I think you cited $50,000,000 in new 5 gs contract signed at the start of the year. What is driving that in your view? Is it just where we are in the 5 gs cycle and build out? Or is there some other catalyst that you think is driving momentum with some of these contracts here?

Speaker 5

First, I think that the momentum now is positive. It's we know that it's not was expected 3 years ago in the 5 gs, but in this at least in the last 6 or 10 months, we see changing in the momentum and there is much more opportunity of 5 gs transition. I think that it's related that as I said, I think also in the previous quarter, trend is nobody can stop it, stop this trend. The strategy is happening and it's connecting very tight to cloud transition also. And Radcom is well positioned with our product and technology and experience.

Speaker 5

So we're not clear and so for the last year, this was to address all these requirements. So this is the momentum that I see.

Speaker 3

I would add that in general, we are still confident on the market evolving into 5 gs. And we still see a demand for other products. And as we executed well this quarter, we are expecting our growth journey to continue. And we do still see that 5 gs gs is strategic to top operators and they are still progressing with their 5 gs programs and they continue to spend their into evolve into 5 gs stand alone and by that creating the demand for our products. I think that operators, we can divide them into 2 groups.

Speaker 3

Those who are excited with our base AI and the autonomous solution that will invest more strategically in the transition to 5 gs. And those who are more conservative that we can invest less in the beginning and to increase their investment in moderate space. And we, Wasscombe, definitely support these 2 models as we believe in long term relationship. And it all depends on the customer's level of confidence and the 5 gs strategy.

Speaker 4

Perfect. Very helpful. And then one if I can on AWS. It sounds like you had one existing customer transition to your SaaS solution. When you think out over the next couple of years, is this something you anticipate that most operators and most of your customers will shift to the your SaaS model over time?

Speaker 4

And as that happens, how are your economics, whether it's pricing or gross margins, is different or SaaS versus your kind of original offering?

Speaker 5

First, I think that most of the operator will do the transition to cloud. Part of them will do it on private. Part of them are going to do that on public cloud. And then the option of SaaS is valid for us. And I think it's a big opportunity for the company to implement our product in more operator in SaaS because the advantage is clear of SaaS deployment.

Speaker 5

So yes, I think that it will happen. We saw it this year and we have an engagement with more customer in this area. So it's very positive.

Speaker 4

And is there maybe this one's for Hadar, but is there anything that we should think about just from an economics perspective, margins, margin impact from more SaaS adoption or is it too early to tell at this point?

Speaker 5

Yes. I think that the advantage is

Speaker 1

very clear on SaaS

Speaker 5

because it's installation is much more easy and the technology options are more advanced in this area. And it's very attractive for mainly for medium and small customers that they don't need to buy some equipment or

Speaker 3

direction

Speaker 5

with the cloud providers. So economical perspective is very attractive because it will be help us to get much more operators compared to the core solution or public cloud or compared to private cloud or a cost solution?

Speaker 3

And I would like to add that the SaaS model may improve our gross margins, more operators transition to this model. The SaaS model is a win win cost and doesn't need to invest additional cost on infrastructure. And for Wazprom, the marginal cost will decrease while the revenue will increase, but we improve the other gross margin.

Speaker 4

All right. That's very helpful. Thank you. I'll cede the floor here and congrats again guys.

Operator

Thank you, Arjun, for your question. The next question is from Alex Henderson. Please go ahead.

Speaker 6

Thanks. So you've obviously produced some very strong numbers over an extended period here. And there is obviously also some lumpiness in this business, which can have an impact in any given quarter. So as I'm looking forward into the September quarter, seasonally that's a little bit softer quarter. Should we anticipate that the business is a little bit more skewed to the December quarter and that the September quarter might be down a year sequentially from the June quarter?

Speaker 6

Or should we assume that the $14,800,000 is at least attainable again in the September quarter here?

Speaker 3

So I will take it. Alex, we are very excited with the results and obviously, our consistent execution is driving durable growth. We did better than expected and we are encouraged by our momentum and see a long runway of growth. We expect this trend to continue and remain on pace to meet our guidance. And actually, we had a very good visibility for 2024 and second half of the year.

Speaker 3

And if you look on the higher end of our guidance, it could be around 18% year over year revenue growth, which is the full acceleration to what we deliver in 2023. I believe that this growth will be reflected in each of the next two quarters and that we will see a linear growth. So this is in terms of the revenue. And if no change in the COEX, we expect a similar trend on the bottom line. As I said in the call, we would like to maintain a similar level of R and D expenses and expect a gradual increase in sales and marketing.

Speaker 3

So as I say, except any forward impact, our profit, we believe the government profit and our profit as a percentage from revenue will be improved.

Speaker 6

The second question is kind of on the same general trajectory. There's been an extremely large amount of volatility around the yen. 1 of your anchor customers is based out of Japan. Does that have any impact on your business?

Speaker 3

No.

Speaker 6

And then relatively speaking, the R and D is expected to be fairly flat sequentially, I'm assuming in June to September. Is the NRE also fairly flat?

Speaker 3

[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] We believe that in the Q3, the NRE will be at a similar level. And I expect that on the Q1, we will see decrease in the NRE due to completion of existing programs.

Speaker 6

I see. And then just broadly speaking, I would assume that there is some upward bias to the OpEx as a total in the 3rd quarter. Is it reasonable to think that you're fairly flat sequentially on the revenues and therefore a little bit above or biased that the EPS in the Q3 ought to be maybe a hair below the $0.20 number?

Speaker 3

Yes.

Speaker 6

Okay, great. Wanted to go back to the commentary that you made on the call regarding end of life of competitive products in the field that are more appliance based in nature. Obviously, the transition to 5 gs is a decision point for most companies. But is that causing an acceleration in that adoption rate that's meaningful? How large an AOL event is that for your competitors?

Speaker 5

Yes. So first of all, the end of life is it's not only related to 5 gs, but it's most of the time it's related. But also I want to emphasize that we see that also the our competitors' systems are start to be end of life and connecting with the 5 gs is a really compelling event for transition to our system. And

Speaker 1

we see that a lot of

Speaker 5

customer and also Tier 1 customer that's struggling with all the service assurance platforms and it's true that they try to manage, but it's eventually it's not working for them. So sure it will not work forever and not even for the next few years. So I think it's remarkably going to help us to take more and more new customers in Lobo.

Speaker 6

I would think that the installed base of those appliance based systems are multiples of your revenue in terms of your shares being fairly low in the historical 4 gs base that the magnitude of that upgrade cycle could be very substantial over the next 2 to 3 years. Is that a fair way to look at this transition?

Speaker 1

Yes, sure. So we've seen it.

Speaker 5

And again, our solution that is totally software based, cloud native based is totally aligned with this transition and address all the customer needs in December and I saw it by myself a few times during the last quarter with big customers.

Speaker 6

Two last questions and then I'll see the floor. The $50,000,000 in orders that you previously announced in the first half, do you think that the order rate in the back half of the year is likely to be similar or do you think that was a spike in wins and that there's more of a lull here short term?

Speaker 3

So Alex, as you know, during the Q2, we renewed the other 8 figure contract with Rakuten. And this is thanks to our strong incumbent relationship with them. And except Rakuten, we won a new deal, including 5 gs deals that had competitive interest, but we secured them due to our strong historical performance, differentiated technology and established relationship. We remain focused on profitable growth and we are going to continue to push the pad on it because we believe that we are aligned with the key technology trends and the way we are confident that our differentiated solution is aligned with the key technology trends and well positioned to address customer's needs. But it's very hard to predict what will be the level of bookings during the next second half of the year.

Speaker 6

So suffice to say, you've got a strengthening pipeline, but exact closure dates are always difficult. I get it. Just wanted to go back to NetTalk for a moment. What do you see is the trajectory of that business in terms of delivering incremental orders and backlog?

Speaker 5

Yes. So first, I think the NLP space on Gen AI. As you know, Gen AI today is very there's a big hype around the JNIE. We see it not only in our area, it's in all the areas that we see today. And we think that we have unique value here, mainly the synthesis between our data and all the knowledge of network and insight synthesize together.

Speaker 5

I think that when we come to the new operator, you know, and also on the current customer, they want to see our vision and our thought leadership. And I think that it's really advanced and progressive in the sale because nobody will want to go with this new service assurance system without new thought leadership on AI and Gen AI, mainly because all the automation transition that Telecom is going to mainly cost money and to save cost. So I think it will influence on our performance for And today, it's helping us in the new logos engagement. So I see it's very important for us. Great.

Operator

This concludes the Radcom Ltd. 2nd quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.

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