RDCM - RADCOM Ltd. (RDCM) Q3 2022 Earnings Call Transcript
RADCOM Ltd. (RDCM)
Q3 2022 Earnings Conference Call
November 10, 2022, 08:00 AM ET
Company Participants
Eyal Harari - CEO
Hadar Rahav - CFO
Conference Call Participants
Arjun Bhatia - William Blair
Alex Henderson - Needham & Company
Presentation
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Results
Conference Call for the Third Quarter of 2022. All participants are present in a listen-only mode. Following management's formal presentation, instructions for the question-and-answer session will be given. [Operator Instructions] As a reminder, this conference is being recorded and will be available for a 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 still need to download it, 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, visibility and expected growth in 2023 and beyond, expectations regarding the enterprise market for telecom operators, including trends in the market and the effect of general economic conditions, continued investment in and benefits from research and development, 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 its products and growth, levels of expenses and keeping them below revenues, the potential for additional multi-year contracts, engagements and expansion of opportunities, the Company's expectations with respect to its relationships with Rakuten 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 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 included in the quarter's earnings release, available on our website.
Now I would like to turn over the call to Eyal. Please go ahead.
Eyal Harari
Thanks, operator. Good morning, everyone, and thank you for joining us for our third quarter 2022 earnings call.
We achieved record revenues in the third quarter, reaching $12 million, representing a thirteenth consecutive quarter of year-over-year growth, double-digit growth of 17% compared to the third quarter of 2021. At the same time, we manage our expenses while investing in the business strategically and efficiently, resulting in a non-GAAP net income for the quarter of $1 million, a four-year high.
We are proud of our best-in-class cloud assurance portfolio that enables operators to manage their networks with advanced AI-driven analytics that provides automated, actionable insights to save engineers' manual labor and help quickly resolve network degradations to ensure great customer experiences. We've built a resilient software-centric business with a strong business model that delivers high gross margins and over 70% recurring revenues from the beginning of the year while offering our customers a forecastable, long-term pricing structure and great value. Our multi-year contract wins have improved a strong backlog, driving consistent results and giving us good visibility into 2023 and beyond.
Turning to the pipeline. We continue to see strong demand for our advanced cloud assurance technology reflected in our healthy pipeline of opportunities as we manage multiple customer engagements at different stages of the sales cycle with a healthy mix of new logos and a current installed base, with most opportunities focused on 5G. We see good momentum for the 5G market and believe it will be a catalyst for growth as the market ramps up, creating more sales engagements that can lead to additional multi-year contracts and increased market share.
Recently, we have been hearing concerns from technology companies regarding the macro economy’s negative impact on the market. We believe the telecom market is robust, as we saw during the more difficult periods of the COVID pandemic. We continue to monitor the situation closely and will adapt as necessary.
We believe 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. We are glad to report that demand looks strong, and we have a solid pipeline of opportunities that has the potential to increase our market share.
With the positive market trends and our healthy pipeline, we're confident in the growth outlook of our business. As a software-focused company, we are very agile and can handle future growth prospects, scale, and meet more demand while continuing to deliver on our current customer commitments. We are happy that the new customers are enjoying our RADCOM ACE software as we deploy it in their networks, and operator teams utilize its capabilities to smartly monitor service quality. We are progressing positively as we continue integrating our software into the cloud environment.
As a 5G and cloud assurance leader, we are happy to be engaged with the teams, work closely with them and offer our expertise to help them as they roll out 5G. With our existing teams, our software can scale seamlessly to many customers, which drives our financial performance and operational efficiency while at the same time delivering on the customer’s expectations and requirements. We are receiving positive feedback and are proud of our employees who are dedicated and committed to delivering on our customer success as we can continue to deploy our solutions and deliver new cutting-edge software releases. Legacy assurance solutions are limited and not flexible. While competitors take weeks or months to deploy, we implement our cloud-based solutions in days or hours.
Our software is the critical source of truth for engineers who need to make quick data-driven decisions affecting millions of subscribers across their entire network stack and all service offerings. We can adapt quickly and deliver features to customers. As we move forward and deploy our software to new customers like DISH, we see the value of our analytics through all stages of the deployment to ensure a smooth network rollout and deliver great customer experiences.
Turning to Rakuten in Japan and Rakuten Symphony. During the third quarter, we announced the renewal of our initial contract with Rakuten Mobile. With this agreement, we continue our successful partnership with this innovative operator, providing advanced cloud-native assurance solutions for their network in Japan.
At the beginning of the quarter, we announced that Rakuten Symphony made RADCOM ACE available in the Symworld marketplace. This integration of RADCOM ACE into Rakuten Symphony streamlines network operations and helps teams understand what is happening in their network and where there are customer-affecting issues. It also provides built-in workflows and unified data analytics to enable more operators to rapidly deploy and roll out 5G with the Symphony platform. Being part of this cloud open significant opportunities for RADCOM in the future.
Turning to our product innovation. We continue our commitment to delivering best-in-class solutions as we enhance our software with more automation and intelligence AI-based capabilities to bring value and expand use cases for our customers as 5G technology moves forward. I am excited to announce that we recently received industry recognition as two of our products were named finalists in telecom-focused award programs that recognize the industry's top companies for their outstanding achievements in next-generation communications technology, strategies, and innovation.
The AI/ML-based solution announced last year for automatic detection of network anomalies and automation in network operation teams was named a finalist in the Outstanding Use Case in the Service Provider AI category in the Leading Lights 2022 awards. In addition, RADCOM ACE was named as a finalist in the Most Innovative Cloud Offering category in the Glotel 2022 awards program.
We invest strategically in R&D to enhance our solutions, increase our 5G capabilities, expand our AI-driven insights, and seamlessly integrate our solution into the cloud. All these capabilities align with market needs and have already borne fruit, as reflected by our recent wins.
To summarize, I am happy with our performance in the third quarter and across the first nine months of 2022. Revenues are up year-over-year by double-digits, and we significantly improved our bottom line. We've built a software-centric company with a strong business model that delivers high gross margins.
Our team has a proven ability to provide best-in-class solutions to some of the most innovative operators in the world. We are working hard to deliver on our customer commitments while continuing to invest strategically in our innovative software to boost features and capabilities. With these new wins and our ongoing sales engagements, we have good visibility, which led us to increase revenue guidance twice during the year's first nine months.
To conclude, we are optimistic about our ability to deliver a third consecutive growth year in 2022 and continue this trajectory into 2023. Accordingly, we are reiterating our 2022 revenue guidance of $45 million to $48 million.
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
Thank you, Eyal, and good morning, everyone.
To help you understand the results, I will refer mainly to non-GAAP numbers, which exclude share-based compensation. Now please turn to Slide 8 for our financial highlights.
We achieved record revenues in the third quarter, reaching $12 million, representing a thirteenth consecutive quarter of year-over-year revenue growth and an increase from $10.2 million in the third quarter of 2021. Double-digit growth of 17%. This resulted in non-GAAP net income for the quarter of $1 million, a four-year high. At the same time, we continue to manage our expenses while investing in the business strategically and efficiently.
Our gross margin in the third quarter of 2022 on a non-GAAP basis was 73%. Please note that our gross margin can fluctuate depending on the revenue mix. We expect that Q4 will remain at a similar level.
Our gross R&D expenses for the third quarter of 2022 on a non-GAAP basis were $4.6 million, an increase of $150,000 compared to the third quarter of 2021. We received a grant of $187,000 from the Israel Innovation Authority during the quarter, compared to $205,000 in the third quarter of last year. As a result, our net R&D expenses for the third quarter of 2022 on a non-GAAP basis were $4.5 million, compared to $4.3 million in the third quarter of 2021. We expect the Israel Innovation Authority grant in the fourth quarter to be at a similar level as in the third quarter.
Sales and marketing expenses for the third quarter of 2022 were $2.8 million on a non-GAAP basis, an increase of $596,000 compared to the third quarter of 2021. The increase in sales and marketing was aligned with the growth in backlog and the good progress we made delivering on our customer commitments. We expect sales and marketing to remain at a similar level in the fourth quarter.
G&A expenses for the third quarter of 2022 were $958,000 on a non-GAAP basis, an increase of $181,000 compared to the third quarter of 2021. Operating income on a non-GAAP basis for the third quarter of 2022 was $545,000 compared to an operating loss of $200,000 for the third quarter of 2021.
Net income for the third quarter of 2022 on a non-GAAP basis was $963,000 or a net income of $0.06 per diluted share compared to a net loss of $333,000 or a net loss of $0.02 per diluted share for the third quarter of 2021. The positive net income was due to the increase in revenue and the favorable impact of changes in foreign exchange rates.
On a GAAP basis, as you can see on Slide 7, our net loss for the third quarter of 2022 was $389,000 or a net loss of $0.03 per diluted share. This compares to a net loss of $1,069,000, or a net loss of $0.08 per diluted share, for the third quarter of 2021. At the end of the third quarter of 2022, our headcount was 289.
Turning to the balance sheet. As you can see on Slide 11, our cash, cash equivalents, and short-term bank deposits as of September 30, 2022, were $70.8 million.
That ends our prepared remarks. I will now turn the call back to the operator for your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question is from Arjun Bhatia of William Blair. Please go ahead.
Arjun Bhatia
Perfect. Thank you and congrats guys on a good quarter. Eyal, I want to start with you. It sounds like you're adding a lot more features and capabilities until the offering telcos are still building up 5G. You're clearly seeing good growth and customers are seeing the ROI. How do you think about pricing power going forward in the model, both with some of the newer rollouts and even with your existing customer base as well?
Eyal Harari
Good morning. Yes. So we are continuously investing our RADCOM 5G platform. We released our 5G solution couple of years ago and since we are continuing enhancing our product, last year, we added our AI based the newly detection capabilities, which are very important to support customers in their 5G journey.
We are really focused now on making sure that we are creating additional evaluated capabilities and use cases in order to make sure that our customers are successful in their journey as they are going to implement their 5G networks. We know that it's not simple. And it requires them not only to deal with 5G as new cloud technology, but also with an integration to cloud So we are primarily focused on making sure the transformation idea is smooth as possible and as efficient as possible.
Those additional new capabilities are added and some of them are used as differentiators when we are going and competing with new opportunities and some are becoming a possible upsell on existing customers that do not have those included. So overall, we are looking to continue to invest in our R&D, continue to create a lot of innovation and we feel very comfortable with our offering to the market.
Arjun Bhatia
Okay. Understood. Very helpful. And then for Hadar, the margin that you generated this quarter that was great to see. When you look out ahead over the next several quarters, where do you see the most opportunity for leverage in operating expenses going forward? Like is this a good run rate of operating expenses that you did in Q3? Or could we see more increases as a percentage of revenue in some areas like R&D, for example?
Hadar Rahav
Hi, good morning. So in the last two years, we saw that our gross margin was around 72%, 73%. And our operating expenses are around $8 million per quarter. We believe that we will keep a similar level of operating expenses with a slight increase in sales and marketing.
Operator
We didn't hear you for a moment. Please continue.
Hadar Rahav
Okay. I said that we believe that we will -- excluding any impact of the shareholder ratio, we believe that we will keep a similar level of operating expenses around $8 million in the third quarter with some incremental increase in sales and marketing expenses.
Eyal Harari
She answered your question?
Arjun Bhatia
Yes. And maybe just last one for me. Eyal you called out the telco -- the strength in telcos and you saw that in COVID and they're still obviously investing in building out. Do you hear any sort of commentary from them walking back or being more cautious on CapEx spend going forward just given how much the -- it seems the economy has changed or is changing, do you see them tightening their belts at all?
Eyal Harari
So overall we see telecom industry being robust and we see the 5G business continues. But of course, the overall macroeconomic situation is affecting everyone. and everyone is a bit more cautious and a bit, it can create some delays for large investments. The positive thing is that most of the operators are already committed to the 5G, many of them are already in a multi-year long term plan that was already initiated and we continue to do so.
There might be some slowdown. We don't know we'll continue to monitor that. The good thing for us is that we are targeting the Tier 1s larger and more powerful operators that are looking on the long term strategy as we see them finally five years important part of their strategy and we have a good visibility with them. So we are monitoring this cautiously and hoping that there will be no effect on the macro economy, but really in case -- in any case or any situation.
Arjun Bhatia
Okay, got it. Very helpful. Thank you for taking the questions.
Operator
The next question is from Alex Henderson of Needham & Company. Please go ahead.
Alex Henderson
Thanks. Let's just continue on that subject, that last question. So clearly in the 5G deployments, those are multiyear long term plans, but there are all other companies and customers you have that are more, call it, traditional still more in the 4G arena than using the technology in the older formats. Those seem like they could be more cyclical and more inclined to cut back. Can you talk to what portion of your business is tied to the 5G at this point and how much of it is what I would call traditional legacy customers.
Eyal Harari
So thank you, Alex. And as I pointed in my prepared remarks, most of our pipeline of opportunities is around 5G. also a big part of our existing business and the recent wins we had earlier this year is around 5G. What we see is that while there is some maybe a mutation or a delay on the radio size on implementing the nationwide coverage on -- an investment with a large traffic spot and this you might see from the traditional radio and tenant providers where we play in the insurance space, which is more on the call, this is not the heavy CapEx investment
And in many ways, they need more other tools as we provide a lot of automation and AI that allow them to do more with less. And as they're adding more technology, they are not going to add more people to their operation. And sometimes they need to optimize adding tools like ours can help them continue to do what they need in a more efficient way and it could also drive the need.
There might be some operators that didn't start yet their journey for 5G. It might delay. This will happen. But as mentioned, most of these providers that are already committed and continuing with their plans.
Alex Henderson
That's what I thought your answer would be. And so looking at the history of the company, you've had number of periods where you've had very good margins up in the 74%, 75% range and some quarters where that's dipped down considerably lower towards the 70% level. And my understanding is that the primary difference between higher margin quarters and lower margin quarters is the amount of traditional equipment that you're selling that sense to have lower margin.
And so if the mix is shifting to the higher margin 5G products and more and more towards straight software and fairly frictionless deploy at that. Then are we now in a peak period where the expansion in gross margins that occurred in '20 to '21 from [indiscernible] and now on another call it 50 to 100 basis points in '22. Where we can start talking about the longer term gross margins up towards the 72% to 75% range as opposed to the 70% to 73% range that I think you've talked about historically.
Eyal Harari
Yes. So overall, we are seeing a trend of improved gross margin and getting closer to the 75% as we go more and more into a 5G cloud implementations. You are likely saying part of the revenue mix, if you said, some of the appliance base this was fluctuating a bit down the gross margin. But there is also that when we implement new customers that have some one-time costs around third-party components of licenses that are adding to the costs as most of the software is very high gross margin.
So we sometimes see some fluctuation in the gross margin, but what we see is that the overall trend is to have better and better gross margin and that is closer to the 75% ranges we continue to scale.
Alex Henderson
Yes. So as we look in the fourth quarter, it looks like there's some upside to our model on the gross margin. Is the 73% mark that we did in the September quarter, the right level for the fourth quarter?
Eyal Harari
Again if we sense again -- quarter-to-quarter, it's always can fluctuate a bit because of the exact revenue mix but this is a good assumption.
Alex Henderson
So if that's the case, then you're really kind of at 73% here. And we've been modeling 71% to 73% out to the '23 out through '24, should I be taking that up to 73% and using that as the new benchmark?
Eyal Harari
As I said, it makes sense as a good assumption, yes.
Alex Henderson
Okay. perfect. I just wanted to be clear on it. Can you remind us -- you don't hedge the shekel at all and your sales outside the U. S. are all in dollars, correct? I mean, outside globally.
Eyal Harari
Okay. Correct. We did not had, so we had some upside from that as the shekel was weakening compared to the dollar and most of our customers internationally are the U. S. dollar based, big part of our revenues is a dollar. So we don't have any significant effect from the foreign exchange.
Alex Henderson
So the shekel is pretty much on to loans for the year here at the end of the quarter. It's down considerably. I think it's double digit decline. So at these levels for the full year, that should help you on the OpEx. Are you reinvesting that OpEx, I think the comment was that you're going to increase sales and marketing slightly, but overall spend in dollars, so it would be fairly flat. So as we look out to '23, is that -- our reinvestment in local currency and therefore that's why you're able to keep it flat and still get the benefit of some additional investment?
Eyal Harari
So we are going to keep our R&D flattish. We are still before our end of the year I have plans, but strategic, let's say, plan, in the couple -- there are couple of years that moving forward, we believe we'll go to the right R&D levels. Of course, trying to take advantage of the improved dollars to share cap ratio to gain some efficiencies and maybe strengthen some of the areas.
We do look into increasing in some level, the sales and marketing in order to capture the market opportunity and part of our walk around the walk plan as we are doing now is to make sure we have the good coverage where the factory operators are more advanced.
So we do look to increase on the loan brand, slightly the operation expense, but as we go and as I mentioned more importantly, we are looking to go next year and as our operation expense increase is going to be modest, we look on better numbers on the bottom line.
Alex Henderson
This question was asked earlier about pricing, but I would like to rephrase that one a little bit. Is there a way that -- or is there any motion in the development cycle that would give you an opportunity to start doing some upsell to existing contracts by adding a bundle of additional features or some additional capabilities that might not have been covered by the existing contracts with some of your customers. Is there an up sell opportunity where we might start to see existing customers buying a larger packaging product from?
Eyal Harari
Definitely. Definitely, we see and we believe it in the past as opportunities by customer enhancing technology category which mentions the add-on application to use for additional use cases or additional products parts that are not necessarily part of what is doing today. We are spending our R&D to create additional innovation. And as I mentioned, it's both in order to add some up sales into our existing installed base, but for sure also to create additional cutting edge capabilities that will allow us to continue and win more contracts and penetrate into additional carriers.
Alex Henderson
One last question I don't see before. So as we look out into '23, we've produced an average of double digit growth over the last three years, you dipped a little bit low in '21 but 14% plus in both '21 and '22. Is it reasonable to think the '23 is another double digit growth rate. I realize that you haven't done your forecasting yet and therefore we're not going to hold you to it. But it seems pretty plausible that given the momentum that you've got that it's another double digit year?
Eyal Harari
Yes. We are looking -- we have good visibility to '23. Many of our customer contracts are [indiscernible] and we already see that 2023 looks like another growth year, likely double digits. Again, it's still early, but we are looking positively to continue in a similar momentum and hopefully improve.
Alex Henderson
Thank you so much and congratulations on good execution and visibility.
Eyal Harari
Thank you, Alex.
Operator
This concludes the RADCOM Ltd. third quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
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RADCOM Ltd. (RDCM) Q3 2022 Earnings Call Transcript