RADCOM Ltd. (NASDAQ:RDCM)
Q2 2014 Earnings Conference Call
July 23, 2014 9:00 AM ET
Noga Fisher – Investor Relations
David Ripstein – President and Chief Executive Officer
Uri Birenberg – Chief Financial Officer
Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Second Quarter 2014 Results Conference. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, July 23, 2014.
I would now like to hand the call over to Ms. Noga Fisher. Ms. Noga, would you like to begin?
Yes, thank you, Milan, and thank you all for joining us. With me today are RADCOM's CEO, David Ripstein and CFO, Uri Birenberg. By now, we assume you have seen the earnings press release which was issued earlier today. It is available on all the major financial news feeds.
Before we begin, I would 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, changing 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 non-cash charges, non-GAAP results provide information that is useful in assessing 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 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, which are included in the quarter's earnings release.
Now I would like to turn the call over to David. Go ahead, please.
Thank you, Noga and thank you all for joining us today. We are pleased to report another good quarter of on-track performance as demonstrated by our rising profits, margins, cash, bookings and collections. This is our first straight quarter of net profit and our gross margin for the quarter was nearly 75% a record for us. For the first half of the year our booking were up 60% and collection were up 59% tripling our cash balance compared to the end of 2013 while reducing our DSOs by a third.
These good results reflect the market's strong reception of our new MaveriQ, a software-based CEM that is Customer Experience Management solution. This is opening the door to more opportunities and larger opportunities than ever before. Therefore we’re confident regarding the second half of the year and continue to make progress inline with our growth.
I would like to spend a few minutes reviewing the factors that are driving our growth. The first factor is the strong market acceptance of MaveriQ, our first software-based solution. It is totally unique in the market, the right product at the right time. The advantage that the MaveriQ brings is super high capacity processing power. This is the industrial strength processing power that operators need in order to improve their data and LTE quality of service.
In addition, MaveriQ is the first box system designed for NFV or virtualization the next technology wave. In NFV as many functions is possible move into software to make the network more flexible and scalable. This is an important selling point to differentiate us from the competition. We released the MaveriQ officially in February and have installed several systems for Q1 operator.
Currently, we are competing in tenders all over the world with the new technology at large and small operators both new and existing customers. We are very pleased with the win rate so far. Beside direct sales, the MaveriQ can be embedded in other product. This offer a potential for revenues from indirect channels, to this end you have joined the Intel Ecosystem and Alcatel-Lucent CloudBand Ecosystem. We believe this will lead equipment vendors to embed our technology into their solutions. We hope to see momentum build on this front.
From a business model point of view, our transition from Hardware Company to Software-Driven Company is making permanent improvements to our business model as well to our value proposition for customers. As you can see, it is improving our gross margin dramatically from the low-60s to the mid-70s. Depending on how quickly we complete hold, there are lower margin projects, our gross margin is likely to take a deeper course, but as we announced six-months ago we are moving towards a sustainable gross margin of above 75%.
Transition to software is also reducing the time from booking to deployment. This is an important customer benefit that translates into more predictable revenue recognition, reduced expenses and faster collections.
In summary, we are on-track according to our long-term plans and optimistic as we look to the future. We are more excited than ever about MaveriQ and its potential. Our transition from Hardware Company to a Software-Driven Company is improving our financial model while offering real value to customers. We are more stable and profitable than ever as expense is well under control.
We feel well positioned with the size and number of opportunities in the pipeline and advancing to them with exactly the right products at the right time. In short, we believe the time is right for RADCOM and we are confident as we continue executing our plan. We therefore continue to see solid growth for 2014 compared to 2013 across all parameters.
With that I will stop and turn the call over to Uri to discuss the financial results. Uri, please.
Thank you, David. Since you have the press release in front of you, I will just go over the highlights. To give you a better understanding of our results, I will be referring to non-GAAP results, which excludes share based compensation for all periods.
Revenues for the quarter were $5 million, down by 9% compared to Q2 2013, mainly due to revenue recognition timing issues. Our gross margin for the quarter was 74.8% a new record for the company. As you know, we have projected the shift to a software-driven model would drive our margin over the long-term to above 75%, due to the reduced cost of goods and an accelerated deployment cycle. We reached this point already this quarter, but given that that we are still completing all the lower margin project, the gross margin is likely to fluctuate before stabilizing at this level in the future.
Our operating expenses for the quarter went down by 6%, compared to the first quarter, demonstrating is successful with expense control. In general, we believe that our expenses are at the right levels for supporting our business and our growth plans. We recorded financial income for the quarter mostly due to the strength of the Brazilian Reais compared to the U.S. dollar.
The combination of the higher gross margin, steady expense and financial income enabled us to generate a solid net profit of $360,000 or $0.04 per share. For the first half, we posted a net profit of $608,000 or $0.07 per share compared to a net loss for the first half of the year 2013. So we are making a good progress.
Turning to the balance sheet, all parameters are inline with our plan. Our collection in the quarter was very good giving us a strong positive cash flow and reducing our DSO by a third. As of the end of the quarter our cash and cash equivalence were $3.9 million, triple the level at the end of year 2013.
Back to you, David.
Thank you, Uri. So that is for the first half. As always, thank you for your ongoing support. With that we would be happy to take your questions. Operator.
Thank you. (Operator Instructions). The first question from [indiscernible]. Please go ahead.
Thank you. Good morning David, Uri. Congrats on the quarter, just going into the software side of the business, could you provide some numbers around software revenues versus hardware revenues for this quarter?
It’s Uri, yes basically the new product we achieved about 60% out of the sales compared to the old product from project.
So 60% is software revenues?
60% is the new MaveriQ technology and 40% the legacy Omni-Q technology.
Could you talk a little bit about, revenue recognition it seemed the quarter could have been a little higher in terms of revenues, and it’s in the press release that you talk about some revenue recognition type of things that make the top line seem a little lower than what it potentially could be?
Yes. Well, basically there was a one project that our expectation was that it would be recognized upon this quarter and due to timing issues it will be recognized over H2 and so from an annual perspective there is no difference, it’s just a matter of timing issues. If we have recognized this project then we have met all expectations as you mentioned.
Okay. And this is going to happen in 2014?
Okay perfect. And could you talk a little bit about what you are doing different, I guess some of it is partly driven by the shift towards the software model, but is there anything different you are doing from booking and collections point of view, you’re seeing some good improvement over the – what other things that you’re doing to make these improvements happen?
Basically, the main improvement is really coming from the MaveriQ. The change is really great for the company and you deal with this kind of a technology, the new technology is really strong and make our life easier in all parameter, easy to install, the customer get more value, so the more of the customer get more value it helps us to finish our commitment and get the payment. This is one that I mentioned and the most important one. In other dimension we learn to work in more efficient way to help us to improve also collection process and agreements with the customer, but again the main issue and the main improvement coming from the new technology.
And just one final question on your tenders that you are bidding for projects that you are like trying to gain. What is the size range of some of these deals that you are going after; could you give us a sense of an average size deal that you’re trying to target for some of these things that are in the pipeline?
Yes. I will refer to my explanation about the MaveriQ, the new technology meet the Customer Experience Management dimension. In the past with the legacy technology we were more addressing opportunities in the area of probe-based service assurance, which bring us a specific size of deals and opportunities. For Customer Experience Management and this is relatively a new market for us to address with a strong need from customer to see the full picture of what's going in the metrics and we can address it with the new technology. So it brings us to opportunities that are bigger than we used to see in the past. I don’t want to confuse you, because really we are not doing the average of the size of opportunities so I don’t have numbers in front of me, but the feeling here and according to the opportunities we have in front of us, we are competing in a much higher range of opportunities than our size of opportunities than in the past.
Got it, thank you. Thank you guys.
(Operator Instructions) The next question from [Indiscernible]. Please go ahead.
Hey guy’s congratulations on the last quarter.
The first thing I wanted to ask was just not from a macro perspective I know you guys are transitioning to the software products. From the last annual report, you guys have discussed that the Telco industry had the experienced maybe some disruption in the first part of 2013 and started to recover at the end of the year. Where do you sort of think we stand today, are you seeing the demand for your product to really pick up?
Yes. Well in our market which is the service provider. First of all, we feel that they are stable. Okay they have money, they invest money, they want to improve their service, so this is why they need this kind of solution like we have and we do not recognize at least in our territories we do not recognize the pressure of course on them, of course they are trying to maximize the deals and there is always competition. So this is what we see in the market, our market segment is relatively big and we are a small percentage of this market. So far us we have a lot of opportunities and a lot of places that we can grow and improve our business. I hope it answers the question.
Yes definitely and I’m just curious from a macro perspective too, I have noticed that the Carlos Slim is breaking up its Telco access down. Do you guys sort of view that as an opportunity to get into some more players down there?
Well it can be, but you know at the end of the day each of the operators – again in our segment, each of the operator take the decision by himself, normally there is no global decision about service assurance of Customer Experience Management provider. So we need to excel at the moment we enter the door of the specific operator, no matter what is the size of the operator and who is the owner, so I see less influence of those macro movements and changes in holdings in service provider.
Okay. All right well thank you for your time and stay safe over there.
Yes, thank you very much.
There are no further questions at this time. Mr. Ripstein, would you like to make your concluding statement?
Yes, thank you Noga, thank you Uri and to you all for participating in this conference call.
Thank you. This concludes the RADCOM Ltd. second quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.
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