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Executives

David Ripstein – President & Chief Executive Officer

Gilad Yehudai – Chief Financial Officer

[Nova Fischer] – Investor Relations

Analysts

RADCOM Ltd. (RDCM) Q2 2013 Earnings Call July 23, 2013 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Q2 2013 Results Conference Call. (Operator instructions.) As a reminder, this conference is being recorded July 23, 2013. I would now like to hand over the call to [Ms. Nova Fischer]. Ms. Fischer, would you like to begin?

Nova Fischer

Yes, Rachel, thank you and thank you for joining us. With me today are RADCOM’s CEO David Ripstein and CFO Gilad Yehudai. By now we assume you have seen the earnings press release which was issued earlier today. It is available on all major financial news feeds.

Before we begin I’d like to review the Safe Harbor Provision. Forward-looking statements in the conference call involve a number of risks and uncertainties including but not limited to product demand, pricing, market acceptance, (inaudible) economic conditions, product technology development, the effect of the company’s accounting policies, and other risk factors detailed in the company’s SEC filings. The company does not undertake to update forward-looking statements.

In this conference call management will be referring 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 noncash charges, non-GAAP results provide information and are useful in accessing RADCOM’s core operating performance and in evaluating and comparing our results of operations on a consistent basis from period to period.

The presentation of this additional information is not meant to be considered a substitute to 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 which are included in the quarter’s earnings release.

Now I’d like to turn the call over to David. Go ahead please.

David Ripstein

Thank you, Nova, and thank you all for joining us today. We’re happy to report a very good quarter for RADCOM. With sales up nearly 60% and lower expenses we have returned the company to profitability.

Our net profit for the quarter was more than $400,000 or $0.06 per share, the third straight quarter that our sales and expenses have been on track with our plan. In parallel, all of our growth engines are working well so we have good visibility for extending both top line and bottom line growth in 2013.

I would like in the next few minutes to explain the main drivers of our growing business and then I will turn the call over to Gilad, our CFO, to discuss our results and the internal programs that have improved our results. As you know, leading telecom operators who come to us for service assurance solutions. We have built our strategy around five main growth drivers and I will go through them one by one.

The first growth engine is our technology and product advantage. Our products are positioned at the top of the market. They’re differentiated in terms of capacity, innovation, and their ability to offer a full suite of solutions in the (inaudible) LTE environment. We invested significantly in R&D to expand our (inaudible) standards and we’ll continue to roll out new products and technologies in response to market needs.

The second driver is the growth of specific market segments that we are targeting, specifically LTE and voice over LTE, or IMS. These are large, emerging areas with big budgets and therefore lots of opportunity. Our solutions for these segments have a very strong reputation and are therefore having a good run rate. In fact, we have recently won a third LTE deal, each one of them in head-to-head competition with our main competitors. This (inaudible) positions us as a clear leader in the LTE market and is helping us win important deals.

The third driver of our business is customer satisfaction. We have built a base of more than 65 satisfied customers all over the world. Most of them offer us potential for big business. In general, repeat business is easier to win and execute and has higher margins. It also generates maintenance service contracts which gives us recurrent, visible revenues. So this customer base is one of our most important assets, and keeping them satisfied is one of our most important activities.

Our fourth driver is the growth of our pilot markets, especially Latin America and Asia. A number of years ago we saw that these regions had telecommunications industries that were growing very fast and recognized that they offered us a particularly strong sales potential. We positioned ourselves to focus on this territory and this strategy has paid off, giving us our strongest sales. They still offer us a lot of potential today, and so they remain an area where we will continue to focus our sales efforts.

Our last growth driver is the creation of strategic partnerships. By partnering we have been able to expand our marketing channels while reducing our sales and marketing expenses. In fact, you can see that these expenses are down 30% year-over-year at the same time as our sales went up by nearly 50%. So partnerships are a triple [grade] – good for us, good for our partners, and even more important good for our customers.

The culmination of these strategic efforts has driven our growth through (inaudible) and we believe they will continue driving our growth for the second half of 2013, and hopefully further.

I’d like to finish up with a few general observations about the telecom market. In our view, during the past two years the telecom market has helped to reinvent itself in response to the smartphone evolution, creating new infrastructure while being limited in its ability to raise ARPUs – that is average revenues per user. However, we feel that the environment is now much more stable and clearly defined. Operators are now much more rational about their investment and as a result the telecom market is a much more stable investment [partner]. This is a climate in which we feel it’s easier for companies of our size and in the service assurance business to operate and grow.

In summary, we have returned the company to profitability and we believe that we are well positioned to move forward. I’d like to stop here and turn the call over to Gilad who will discuss the financial results and our internal programs that have helped us return to profitability. Gilad, please.

Gilad Yehudai

Thank you, David, and hello everyone. Since you have the press release before you I will just go over the highlights. To get a better understanding of our results, I will be mostly referring to non-GAAP results which exclude share-based compensation for all periods.

Revenues for the quarter were $5.4 million, up 59% compared with Q2 2012, and up 19% compared with Q1 2013. This derives from the good progress that we are making in executing our backlog together with the new orders that we are receiving from existing and new customers many of which have shorter delivery times. This is enabling us to recognize revenues faster on average than we did in the past.

I’d like to discuss this in more detail. As you may remember, until recently our revenue recognition was often held up due to challenges in execution which delayed the achievement of milestones. But during the past year we have improved our execution dramatically. We have streamlined our processes, making us much more proficient in delivering and installing solutions.

As a result, we’re able to execute our orders much faster and this translates directly into faster revenue recognition. Gross margin for the quarter increased to 67% from 57% in Q2 2012 and 66% in Q1 2013. This is moving us closer to our long-term profit margin of about 70%. The exact value will fluctuate from quarter to quarter depending on the mix of sales.

Our operating expenses have continued to trend downwards. In Q1 we reported that our GAAP expenses were down nearly $1 million compared to Q1 of last year, and this quarter we reduced them by another $100,000. We believe the current level is right for our business at this point, a level that can support our current business as well as our growth plans, so we do not expect to have to scale them up for some time.

I would like to draw your attention to the support and (inaudible) expenses which has been reduced this year below what we expected due to its reduced budget. This was also below what we received in previous years. If the support we had expected had come through, our profits would have been even higher.

With higher revenues, improved margins, and with lower operating expenses we were able to generate solid operating and net profits. Our non-GAAP net profit for the quarter was $419,000 or $0.06 per share. At our current level of expenses and gross margin, our breakeven point is about $5.2 million. This is down from $6.5 million at the end of 2011, and it’s a level that supports our current level of business and our near-term growth plans.

Turning to the balance sheet, all parameters are in line with our expectations. It is more stable than it was in the past, reflecting the contribution of the $3.5 million PIPE transaction which we completed in April. Investments in the PIPE were from both existing and new investors and we would like to thank each of them for their confidence in RADCOM. The investment allowed us to reduce our bank loan and therefore our financial expenses.

So taken as a whole, we’re in good financial shape and well positioned to carry out our growth strategies. Back to you, David.

David Ripstein

Thank you, Gilad. Before taking your questions I’d like to thank you for your ongoing support. We are proud to have returned the company to profitability and we are dedicated to building the company in ways that will create shareholder value. We look forward to reporting our progress in the quarter ahead. With that, we would be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) There are no questions at this time. Mr. Ripstein, would you like to make your concluding statements?

David Ripstein

Yes, thank you and we’ll be with you in the next quarter.

Operator

Thank you. This concludes the RADCOM Ltd. Q2 2013 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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