Predictably, the stock sold off following news of the shelf registration as investors feared dilution. Yet I believe there is a very good reason to have an active shelf available, and I doubt Radcom will raise money except if raising capital is absolutely required to close new Tier-1 anchor customers. And if that is the case, I still view that trade off as beneficial to shareholders and accretive to value over the long run.
Speaking to Radcom's financial position, lost in the selloff following the 20-F and F-3 statements was the fact that Radcom actually collected the full $18 million from Amdocs (NASDAQ:DOX) with respect to the 'groundbreaking' purchase order secured on December 28, 2015, and disclosed on January 4, 2016. The information was buried in the Related Parties section of the 20-F, see pages 68-69. My guess is Radcom didn't press release this material information because it could be precluded by the NDA, but mandatory in a regulatory filing because the cash collection is a material subsequent event. To put this in perspective, $18 million is about 15% of Radcom's current $115 million market capitalization.
In March 2016, we received an initial payment of $18 million pursuant to the Supplemental Agreement with Amdocs Software, in connection with which we entered into the End User License Agreement with the Tier 1 North American mobile operator.
To that end, I expect Radcom's cash balance to be above $20 million when it reports its first-quarter results in a few weeks. While figuring out when this cash payment will be recognized as earned revenue is difficult, there are clues within the exhibits to the 20-F statement which suggest Radcom could realize a sizeable amount of the cash as revenue in Q1. Either way, the cash is in the bank and working capital has been bolstered nicely.
Clues Regarding 'NFV Mega Deployment' Revenue Recognition
Let me state that I don't necessarily think the timing of revenue recognition is the most aspect of this deployment. Rather I view the cold, hard cash in the bank as integral to equity value. Value, of course, is driven by all the future cash generation of a business, discounted back to present value. Getting more of it upfront has more value to investors.
That said, I want to highlight some of the language within the exhibits which could indicate a more rapid revenue recognition cycle for Radcom.
Payment Terms (Section 10 of Amdocs / Radcom Value Added Reseller Agreement)
All undisputed amounts owed by Amdocs to Radcom shall be due hereunder within [**] days following the later of receipt of the applicable invoice or actual payment from the End User. All undisputed fees owed by Radcom to Amdocs shall be payable within [**] days following the later of Radcom's receipt of an invoice from Amdocs or receipt of payment from the End User. Radcom will not issue the invoice before the Products sold to the End User have been delivered to the End User and in case of software licenses, not before the Products were made available to the End-User. Invoicing for applicable services shall be in accordance with the relevant service agreement between the Parties or as otherwise agreed in an applicable service order.
Radcom must have at least 'delivered' MaveriQ or made it 'available' to the End User because Radcom is not allowed to invoice for the $18 million before delivery occurs, at least according to the payment terms of the VAR agreement. And we know that the $18 million payment is the LATER OF [xx] days following  an invoice from Radcom or  actual payment from End User.
Using that logic, we know that the End User - let's assume it is AT&T (NYSE:T) since they are a big shop for Amdocs and considered the thought-leader in NFV networks - paid for MaveriQ which had to be delivered by Radcom. What we don't know is whether or not AT&T "accepted" MaveriQ which impacts revenue recognition. However, given AT&T has suggested it plans to virtualize 30% of its network by year-end 2016, up from 5.7% at the end of 2015, I think it's safe to assume that AT&T is trying to "accept" product as quickly as possible to get a lead on competitors in NFV.
Software Revenue Recognition Guidance
According to AICPA Statement of Position ("SOP") 97-2, paragraph 8, which governs software revenue recognition, the SOP defines basic software revenue recognition criteria as follows:
- Persuasive evidence of an arrangement exists.
- Delivery has occurred.
- The vendor's fee is fixed or determinable.
- Collectibility is probable.
In my view, all of these criteria are met for Radcom and the software deal in question. Radcom has proper agreements in place with Amdocs and the End User; delivery has occurred based on Radcom invoicing and getting paid by Amdocs (delivery is a prerequisite to issue invoice and get paid based on Payment Terms of the VAR agreement); Radcom's fee is determinable ($18 million based on December 28, 2015, purchase order); and collection already took place in March 2016.
All that said, the biggest hurdle for revenue recognition is generally customer acceptance. Radcom indicates in its 20-F:
Products are typically considered delivered upon shipment. In instances where final acceptance of the product is specified by the customer, and the acceptance is deemed substantive, revenue is deferred until all acceptance criteria have been met. Our arrangements generally do not include any provisions for cancellation, termination or refunds that would significantly impact recognized revenue. Large-size deals usually include acceptance criteria and since the delivery of such projects can take on average between 6-15 months, revenue recognition for such projects is delayed.
Time will tell how long it takes for the End User to "accept" the product, but I'm operating under the assumption that AT&T wants to rapidly deploy NFV which suggests a shorter customer acceptance period than normal. In particular, I believe AT&T wants to see a return on that $18 million investment sooner rather than later. For comparison purposes, another NFV player RadiSys (NASDAQ:RSYS) disclosed an $11 million MediaEngine software product win in May 2015 with a large Asian carrier (presumably Reliance Jio) and recognized the entire amount in Q3 and Q4 2015 (a 45/55% split) with the cash collected in Q1 2016. I think Radcom's Tier-1 deployment could follow a similar timeline with better payment terms, given cash has already been collected as of March 2016.
In addition, the Amdocs/Radcom Supplemental Agreement indicates several milestones as part of the purchase order, so it could be that Radcom earned at least some portion of the revenue (i.e., it's not an all or nothing proposition) depending on how many milestones were achieved in Q1 (see section 4.3). There is an Appendix A which outlines the Statement of Work schedule and likely would help evaluate the timeline for customer acceptance, but that appendix was not included in the regulatory filing.
$50 Million Shelf Registration
While it may seem odd for Radcom to register a $50 million shelf given all the fresh cash on the balance sheet, I view the filing purely as a procedural move. Running with an active shelf is good corporate governance and is another tool in the toolkit to show potential Tier-1 anchor customers that Radcom has plenty of access to capital to support a much higher level of business.
Many commentators on prior Radcom articles aren't so sure. But it is my belief that Radcom won't issue new shares just to issue new shares. Rather, the only way it would dilute current shareholders - including Zohar Zisapel who is a Board member and 30% owner - is if it means closing at least one high ROI Tier-1 opportunity which would add significant value to the underlying business.
There is no other reason to issue stock given cash is now north of $20 million, providing plenty of runway for operating the business even with increases to the R&D budget.
More Clues Regarding Accelerating NFV Adoption
One issue with investing in telecom is that CSP budgeting decisions usually require significant lead time which can lead to lumpy results for vendors, especially for small, niche players like Radcom. But it also slices the other way: there can be a tsunami of investment which niche players can capture and enjoy rapidly improving fundamentals in terms of backlog which translates into future revenue, earnings and cash flow.
To that end, I found the following pertinent information regarding the state of NFV and Radcom's strategic positioning in the Risk Factor section:
Our plans to focus our sales efforts in Tier 1 and other leading CSPs in the North American and European markets may not be successful.
With the recognition of our technological leadership in the service assurance for NFV we have started to enhance our presence in North America, Europe, and Asia where a significant share of the NFV activity is taking place. We plan to expand our foothold in these markets, both directly and indirectly through partnerships. Although our recent selection by a top tier 1 leading North American mobile operator is expected to significantly help open doors to a relatively untapped market for us, we may not be successful in expanding our business in said markets.
Our expectation that the NFV market will continue gaining momentum during 2016 and thereafter may not materialize.
Although the majority of the industry's leading CSPs are either evaluating NFV or have started deploying virtualized solutions for their network functionality, and despite our expectation that the NFV market will continue to gain momentum during year 2016 and thereafter, the actual pace of NFV transformation may take time, and as a result the market's need for our NFV solution may take more time to materialize.
We may not deliver and implement successfully our solutions to a leading North American mobile operator.
On December 28, 2015, we entered into an End User License Agreement with one of Amdocs Software's customers, a top-tier leading North American mobile operator, pursuant to which we would grant a license to use our NFV solutions. We may not deliver and implement successfully or timely our solutions to this CSP and as a result, we may incur losses.
Radcom also included other bullish comments within its 20-F which are worthwhile to point out. In particular, Radcom management believes NFV investment is beginning to accelerate which could indicate a tsunami of bookings over the next 12-18 months.
In December 2015, our MaveriQ solution was selected by a top-tier North American mobile operator for its next-generation virtualized network environment. This deployment represents one of the first NFV networks of scale in the industry, and we were selected after a vigorous and lengthy validation process against several competing products. We are now in the process of deploying our software-based NFV solution with this leading CSP, and we are leveraging this success in discussions with other CSPs looking to manage existing networks while accelerating their roadmaps towards next-generation NFV architectures.
In my mind, this statement is very bullish for Radcom which has the early technology lead in NFV service assurance software and the market could now snowball, now that deployments are starting to occur.
To that end, Radcom could enjoy an exponential increase in backlog and future revenue if it closes 1-2 large Tier-1 anchor customers this year. I expect at least NTT DoCoMo (NYSE:DCM), Deutsche Telekom (OTCQX:DTEGY), Verizon (NYSE:VZ) and Telefonica (NYSE:TEF) to make decisions this year given they are the early movers on NFV (behind AT&T).
In my mind, there is a path to a $100 million revenue run-rate over the next several years as these large, multi-year $50 million+ NFV deals play out. Given the financial model for Radcom which features 80% gross margin software revenue and relatively fixed corporate overhead expenses (in other words, Radcom has massive earnings leverage), I believe there is a path to $4+ EPS as revenue scales and is spread across 9-10 million common shares outstanding. That type of earnings growth should cause a dramatic increase in the value of Radcom shares, especially if NFV service assurance is indeed a winner-take-most market.
In my mind, Radcom remains a compelling risk/reward investment ahead of what appears to be string of very positive operating results and news flow for the company.
Receiving the $18 million cash payment de-risks the business in the short-term and indicates Radcom is making good on certain milestones and commitments under the 'mega NFV deployment' that is currently underway with a leading North American mobile operator.
While it remains to be seen how the cash collection will affect revenue and earnings in the next two quarters, the point is that Radcom is now playing in a new arena which could lead to dramatic value creation over the next several years. If that is true, Radcom shares stand to benefit handsomely.
Disclosure: I am/we are long RDCM, RSYS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.