RADCOM Ltd. (NASDAQ:RDCM) Q3 2014 Earnings Conference Call October 29, 2014 9:00 AM ET
Executives
David Ripstein - President, Chief Executive Officer
Uri Birenberg - Chief Financial Officer
Analysts
Amit Dayal - H.C. Wainwright & Co
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Third Quarter 2014 Results Conference Call. 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, October 29, 2014. I would now like to hand over the call to Ms. Noga Fisher.
Ms. Fisher, would you like to begin?
Noga Fisher
Yes, thank you, Johnny 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 a few hours earlier -- 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.
David Ripstein
Thank you, Noga and thank you all for joining us today. The third quarter was a period of a stronger progress with outstanding financial results. As you can see sales were more than 6 million for the first time in many years, up 26% compared with the last year. Our gross margin was 66% compared with 61% for 2013, continuing incline towards to our long term target of over 75%.
Operating profit -- net profit operating margin and operating profit, all set new records for the company. This has given us our four straight quarters of profits and we believe the best is still ahead. This excellent result demonstrate what view as the new business as usual for RADCOM, strong growth, strong expense control, growing opportunities and a good win rate.
The main source of growth is MaveriQ, our new customer expense management solution for the LTE and data environment. It has been recognized as a fantastic tool for operators to keep the customers happy, which translates directly into revenues for them. For us this means opportunities and sales. Our timing with MaveriQ is very good. We have come out at the beginning of the LTE cycle, which is just starting to pick up speed.
For example, according to Ericsson in five years 80% of subscriptions in Asia Pacific will be LTE and according to Global Mobile supplier nearly 600 operators are currently investing in LTE in 168 countries. It’s our own customers especially in Latin America and Asia Pacific, we are seeing the beginning of strong LTE investment. But LTE networks have an important pin point. There are so complex that it is almost impossible to track down and solve service programs without using the right monitoring tools.
That is where the MaveriQ comes in. It uses super high capacity processing power and support protocol analysis to identify and solve problems even before customer notices. As a software based solution it is fast and easy to deploy. Operators install it in weeks, instead of months and see an immediate improvement in the customer retention. MaveriQ's unique capability of bringing the small opportunities and larger opportunities than ever before mostly with Tier 1 and Tier 2 operators, some are for massive projects that enable us to propose more tier agreements and customer appreciate these options.
During the quarter we announced a new win with Tier 1 operator in Europe and we hope to be able to announce additional good news soon. In parallel our transition from a hardware company to software driven company continues to make permanent improvement to our business model. It is driving our gross margin from a low 60s to a new long term target of about 75%. We are not there yet, but having achieved a 69% gross margin for the first nine months, we are well on our way. In addition our transition to a software based solution is reducing the time from booking to deployment. This benefits the customer while making our revenue recognition more predictable, reducing our expenses and improving our collections.
In summary the third quarter was outstanding. Our business is stronger than ever and we look forward to additional good quarters ahead. We have the right products for large fast growing markets and our plan is delivering good results. We expect to continue growing in Q4 and throughout 2015 and look forward to reporting our progress overtime.
With that I’ll stop and turn the call over to Uri to discuss the financial results. Uri, please.
Uri Birenberg
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 was $6 million, the highest level in many years. This is up 26% compared with the third quarter of 2013 and 21% compared with the second quarter. For the first none months of the year revenues were $16.4 million, up 11% from year 2013. Gross margin for the quarter was 66%. This is a significant improvement compared with the 50% for the third quarter of 2013 and 61% for 2013 overall.
For the first nine months of the year gross margin was 69%, compared with 62% in the first none months of 2013. As David said we expect the shift to a software driven model to increase our margin over the long term to above 75%. In the mean time the expected gross margin for any one quarter will depend on the mix of sales.
Our operating expenses were steady again during this quarter. It remains at the right level for supporting the company for the next several quarters at least. Our grant from the Chief Scientist was allowed to this quarter, reflecting a catch up from the lower grants of the past two quarters. We have clocked at an all time record operating income of $1.2 million. This is a 20% operating margin which is also a record for us. Financial expenses for the quarter were $300 to $9000 compared with the financial income that we recorded during the last two quarters. Both the expenses and the income are from changes in the exchange rate between the dollar and the other currencies we use, including the Israeli shekels, the Brazilian real and others.
Net income for the quarter on a non-GAAP basis totaled $872,000 or $0.11 per share. This is another company record. As David mentioned, this is our fourth straight foreseeable quarter. For the first nine months net profit totaled a record of 1.5 million or $0.18 per share, compared to a $1.1 million net loss for the first nine months of year 2013. So we're in completely different position than we were this time last year and we are optimistic looking forward.
Turning to the balance sheet, all parameters are in line with our expectations. Our collections in the quarter were very good giving us our third quarter in a row with positive cash flow. As of the end of the quarter our cash-and-cash equivalent were $4.5 million, up another 17% from the second quarter. This is up $3.3 million in just three quarters. Next to you, David.
David Ripstein
Thank you, Uri. So that’s it for the first quarter we are pleased with our progress working according to plan and continue them regarding the future. We thank you for your ongoing support. With that we will be happy to take your questions. Operator?
Question-and-Answer Session
Operator
Thank you. (Operator Instruction) The first question is from Amit Dayal of H.C. Wainwright. Please go ahead.
Amit Dayal - H.C. Wainwright & Co
Thank you, congratulations on the strong quarter guys. Just really quickly a few questions, I want to start with whether you can provide a breakdown of the product and services revenues for the quarter?
Uri Birenberg
The product -- the new product that we are selling with about 30% out of the total sales.
Amit Dayal - H.C. Wainwright & Co
Okay.
Uri Birenberg
In Q3.
Amit Dayal - H.C. Wainwright & Co
Okay.
Operator
(Operator Instructions) There are no further questions at this time. Mr. Ripstein, would you like to make your concluding statement?
David Ripstein
Yes, thank you Noga, thank you Uri.
Operator
Excuse me Mr. Ripstein there is an additional question would like to open them.
Uri Birenberg
Yes go ahead. Thank you.
Operator
Amit Dayal, you'd like to continue with another question?
Amit Dayal - H.C. Wainwright & Co
Yes, thank you. I got cut off, I don’t why. But, can you talk a little bit about the R&D expenses this quarter, it came in a little lower. You mentioned something in relation to grants in your statements. Could you just clarify that happened this quarter? And what levels we should see R&D kind of come in at next quarter?
Uri Birenberg
Yes, so basically where we’re sitting grants from the Chief Scientist office in Israel. We are attending different plants and asking for grants. We were supposed to get this grant at the beginning of the year, some of the grant was postponed, and was approved just by a few weeks ago during Q3. So it allows us to recognize and to reduce expense record. If I catch up -- the main difference is a catch up for Q1, Q2.
Amit Dayal - H.C. Wainwright & Co
This should come back to the previous levels that we saw for the next quarter?
Uri Birenberg
No it means that it will be more or less around 400, third quarter -- it’s a normal.
Amit Dayal - H.C. Wainwright & Co
Okay perfect. Thank you. And then you saw some foreign exchange fluctuations, 300,000 roughly impacted during the net income I guess. What are we doing to address this, given that it is a significant percentage of potential profits that were lost?
Uri Birenberg
Well basically if you look at the whole nine months of the year, you are going to see that the effect of the FX and the effect of the financial expense is not materially high. It’s about $50,000 dollar. So on Q1 - Q2 we earned from the effects of the FX. And from Q3 it was opposite way around, we prefer not to play with the currencies and with prefer to put our focus not in hedging and not playing with financials, but doing our job.
Amit Dayal - H.C. Wainwright & Co
And just going back to the gross margins. You had mentioned some fluctuations in gross margins for the next few quarter, given smaller margin projects that are being completed. Are most of those out of the way or should we still expect some fluctuations in margins on a sequential basis continue start stabilizing maybe towards the 75% level?
David Ripstein
Hi Amit this is David, good morning. Let me try to clarify this issue. You know we have a backlog that we are managing with our legacy technology and most of the new sales are with a new technology which has much better gross margin. So you can expect a mix between those two coming few quarters. This quarter, we had more legacy technology than the new technology, so its end up with 66%, as time will pass we will see better gross margin and we will meet our target of 75% and may be even more than that. There can be fluctuation from one quarter to another. So I suggest to look on few quarters, like we are looking on the last three quarters and see 69% and we are happy with this number.
Amit Dayal - H.C. Wainwright & Co
Okay got it. Thank you.
Operator
Mr. Ripstein would you like to make your concluding statement.
David Ripstein
Yes, thank you Noga, thank you Uri and to you all for participating in this conference call.
Operator
Thank you. This concludes the RADCOM Ltd. third quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.
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