GTMEY - RADCOM Adds New Customer Hits An Inflection Point

Summary

• RADCOM Ltd. announced a new customer win with an undisclosed operator in North America for its RADCOM ACE solution to deliver real-time insights into the client’s network performance.
• RADCOM is selling its assurance solutions to “early adopters” in North America, Europe, Asia, and Latin America. As standalone 5G implementations increase, we see the start of a domino effect.
• RADCOM achieved its thirteenth consecutive quarter of year-over-year revenue growth and forecasted double-digit growth for 2023. New wins like the just-announced North American operator may only accelerate RADCOM’s trajectory.
• Rakuten Symphony partnership could represent the key to reach more Tier 2 and Tier 3 carriers and should further accelerate RADCOM's growth. We speculate this new win may be Rakuten-related.
• A positive snowball effect may self-generate over the next few years. We believe that the company has gained positive momentum and finally reached its inflection point.

RADCOM Ltd. ( RDCM ) recently announced a new customer win with a mobile operator in North America for its RADCOM ACE solution.

This undisclosed Telecom is described as a mobile operator running an existing 4G network, and expanding its 5G coverage nationwide.

RADCOM ACE was chosen to help the mobile operator deliver high-quality services while proactively ensuring great customer experiences.

RADCOM’s background

For those of you unfamiliar with the company, here is a quick compendium of RDCM.

RADCOM services target a very specific niche of the Telecom market, next-generation cloud assurance for 5G deployments.

The company was the first assurance vendor to go cloud-native.

RDCM is currently selling its solutions to “early adopters” in North America, Europe, Asia, and Latin America.

The company adopts a multiyear recurring business model, resulting in a very predictable revenue stream, combined with a very high margins product offering (in the 75% range for its 5G services).

RADCOM has basically no debt, and $71 million in cash (half of the company’s market cap, as we write).

RDCM guided for $45 million to $48 million in revenues in 2022.

We estimate that its two major customers, AT&T ( T ) and Rakuten ( RKUNY , RKUNF ), represented roughly 80% of total revenues in 2020 and 2021. If our calculations are correct, their revenues were roughly $20 million and $11 million, respectively.

The company won what was probably the 1st 5G standalone [SA] assurance contract with Rakuten in Japan, and the first SA 5G network deployed on the public cloud [AWS] with DISH ( DISH ) in the USA.

The market for RADCOM’s services is still in its infancy.

The complexity of 5G networks will drive the need for assurance services, but the transition to SA 5G is just at the very beginning.

Asia and North America are leading 5G rollouts, while Europe and South America are slightly behind in adopting this new technology.

The following chart is, we believe, a nice visualization of the status of 5G worldwide deployments.

Standalone 5G deployments are just a very small part of the market (3%), and even considering all mobile operators investing in SA 5G networks, at the moment, what we can visualize is a very small tip of the iceberg:

RADCOM’s TAM (total addressable market) could be very huge, over the long term.

Its customer win are impressive, related to the very small number of mobile operators that have already deployed SA 5G services.

Even if the company will only be able to reach a relatively small piece of its total addressable market, it could translate into a multi bagger from today’s level.

However, there are always two sides to the coin.

Watching paint dry

RADCOM services are mostly implemented by mobile operators in a mature stage of their transition to SA 5G services.

They may not be perceived as a must-have when starting a SA 5G network, but they become essential as the complexity of the network and the need for AI/ML-driven automation grows.

In addition to that, the RDCM selling cycle may be quite long - the deployment of their services may be subject to trial periods, often under NDAs, and the rump to revenues may require several months/quarters.

Being invested in this company has, so far, required a lot of patience.

The lack of “instant gratification,” due to the time needed to go from an initial trial to the signing of a multi-year contract that produces a clear reflection on the company’s top line, has made following the company as exciting as watching paint dry.

The market is in a “show me the money” mood, while RDCM advancements (reaching key technical milestones, and enjoying a healthy pipeline of opportunities) don’t immediately translate into revenues.

We have tried to visualize what we see as RDCM trajectory to a finally mature (and rewarding) market in the following chart:

We believe that the company has already built a unique product for its niche and reached a solid number of “SA 5G early adopters” around the world, including its most recent North American win.

This positive momentum should translate into RDCM delivering solid double-digit revenue growth in 2023 - we actually believe that the company will accelerate its recent growth trajectory.

Under this positive scenario, we also expect that more investors will be putting RDCM under their radar screen, due to the company finally proving the effectiveness of its recurring revenue, high margin business model.

Let’s address the reasons why we believe the company has finally reached an inflection point, and is now ready to benefit from a strong domino effect, led by its recent inclusion into Rakuten Symphony product offering.

RADCOM Direct and Indirect sale channels

RDCM should enjoy a first mover advantage when it comes to its specific product offering, having partnered with some of the very early adopters of SA 5G networks.

RADCOM’s two main contracts were signed with an incumbent Telecom like AT&T and an innovative player like Rakuten.

We believe these customer wins should provide the market with a clear indication that RDCM product offering may be fit both for a traditional mobile operator moving to SA 5G, as well as for a new player embracing a new, revolutionary approach to building a SA 5G network.

RADCOM is directing its sales efforts mainly to Tier 1 Telecoms, as explained by in this 2019 interview [edited for clarity]:

One of RADCOM's most conspicuous features is that, even though it is not a huge company, it has Tier-1 customers, among them AT&T, Globe Telecom ( GTMEF , GTMEY ), and Japanese company Rakuten.

One of the tasks [former CEO Yaron Ravkaie] has assumed: to take a company that had already invented a large proportion of the technology and give it the "DNA of mega-scale orientation" in order to serve the big customers.

Successful companies in this sector focus on Tier-1 [customers].

However, RADCOM’s association with Rakuten has been, in our opinion, a game changer for RDCM, opening the way to a very rewarding indirect sale channel, that may have delivered some of the most recent wins, including the unannounced North American operator.

It’s as if RADCOM had doubled the number of domino raws that may generate its expected chain reaction.

It doesn’t really matter which raw starts falling first: the end game is an increased (and more effective) market penetration.

Rakuten approach to building a 5G network.

Rakuten built the world’s first Open Radio Access Network [ORAN] network.

Tareq Amin, CEO of Rakuten Mobile, pushed a completely revolutionary concept into existence.

Here is how he explains his vision [edited for clarity]:

One of the first key elements I wanted to change is adopting this unique cloud architecture, because nobody had really deployed an end-to-end horizontal cloud across any telco yet.

The second element is this thing called Open RAN, which is the idea of disaggregating hardware and software.

The third element, my ultimate dream, is the enablement of a full autonomous network that is able to run itself, fix itself, and heal itself without human beings.

The idea that many more vendors can compete to build the radio access hardware that Rakuten Mobile can use to run its own software on leads to a network that is much cheaper both to build and to run:

I know my cost today is 40 percent cheaper in running my network than any competitor in Japan.

Dish’s network is the third ORAN network built in the entire world.

As we underlined at the beginning of our article, Dish represented RADCOM’s first SA 5G network deployed on the public cloud, through Amazon ( AMZN ) AWS services.

As the Verge article we already quoted underlines , “Rakuten Symphony is helping Dish run its network here along with another network called 1&1 in Germany.”

It’s our educated guess that the unannounced European customer for RDCM’s assurance services could be Germany’s 1&1.

1&1 currently operates as a virtual mobile network operator and broadband provider.

However, the company is working towards becoming Germany’s fourth national mobile operator.

1&1 recently managed to meet its deadline of launching initial fixed wireless access [FWA] services before the end of 2022 in a few German cities like Frankfurt am Main and Karlsruhe.

Although it missed its target to install at least 1,000 base stations across Germany by the end of 2022, it is required to reach at least 25% of households by the end of 2025 and cover 50% of the country’s population with 5G services by 2030.

Appledore Research has an interesting update on 1&1 rollout:

In conversation with Symphony CEO Tareq Amin, Chief Revenue Officer Rabih Dabbousi, 1&1 CEO Michael Martin gave new details of 1&1’s progress and thinking on key aspects of its plans.

The fully cloud-native core network is in place and working. 1&1 is already the largest telco edge cloud network in Europe. The biggest challenge now is the rollout of antenna sites.

1&1 has been holding a friendly user trial over the last two months.

For their friendly user trials, they have started with gaming, to illustrate their network’s ability to support low latency.

The results are certainly impressive, with typically a 3msec latency sustained between gamer and application server over the network.

In more prosaic terms – a Minecraft player using the 1&1 network has the edge over another player on a higher-latency connection!

As indirect confirmation of our speculation about 1&1 being the unannounced European RADCOM customer, we found a couple of references on LinkedIn from existing and former RDCM employees leading to the this conclusion.

We expect that RCDM will be starting generating a meaningful revenue stream from 1&1 during 2023.

If two coincidences are a clue, three coincidences may be a proof

While we would love to discover that the unannounced North American customer is either Verizon ( VZ ) or T Mobile ( TMUS ), given the size of these two U.S. networks, we would be more inclined to look at a Canadian mobile operator as the potential new client.

Canadian network operator Telus ( TU , T:CA ) has recently been exploring options with Rakuten Symphony [edited for clarity]:

Telus is the latest telco to explore the potential of deploying Open RAN technology in its network and is in the process of developing a broad trial with Rakuten Symphony according to Tareq Amin.

“We have been engaged with Telus for almost three months,” Amin told TelecomTV during a conversation held at the Digital Transformation World event in Copenhagen [in September 2022].

“Telus is a brilliant example” of the kind of company a telco needs to be these days, he added. “The company’s management is very open minded”.

A partnership between Rakuten and Telus would also be very interesting to watch as the Canadian operator is not a “greenfield” operator, building its 5G network from scratches:

“We need a brownfield [example]. You know, it could be Telus. It could be Telefonica. It could be one of those operators that want to do something different. And if we have enough of such cases, in which TCO [total cost of ownership] is validated, then I think people will stop talking about how Open RAN isn’t fit for purpose in commercial mobile networks”.

Telus will require vendors to support Open RAN specifications, as confirmed by the company’s VP of network and architecture strategy, Bernard Bureau.

As a national wireless carrier, TELUS competes with BCE Inc. ( BCE ) and Rogers Communications Inc. ( RCI ), and reaches around 9.2 million wireless subscribers.

Conclusion

Indicating the RADCOM Ltd. unannounced customer as Telus on the only basis that the Canadian network operator has started a trial of Rakuten’s technology may sound like a speculation based on a weak clue - however, there are not many other candidates that fit RADCOM’s description (North American operator with an existing 4G network and developing a 5G nationwide rollout).

We believe there is a lot of sense for RDCM investors to closely follow any new development on the Rakuten Symphony front: the Dish and 1&1 customer wins are there to prove that RADCOM may only benefit from being sold under Rakuten’s integrated product offering.

Once you embrace Rakuten Symphony offering, it makes little sense for any customer to deviate from their package for service assurance, and network insights products.

Even if our speculation on Telus was wrong, we would welcome any Tier 1 partnership with another U.S. or Canadian national wireless carrier as confirmation of our thesis: RADCOM Ltd. domino effect may be finally in place, as more networks move to SA 5G and watch early adopters as an inspiration for their choice when it comes to a fully automated assurance platform.

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