Radcom Ltd. (NASDAQ:RDCM)
Q3 2007 Earnings Call
October 29, 20079:00 am ET
Noga Fisher - Investor Relations
David Ripstein - Chief Executive Officer
Jonathan Burgin - Chief Financial Officer
Welcome to the RADCOM Limited third quarter 2007 resultsconference call. All participants are present in a listen-only mode. Followingmanagement's formal presentation, instructions will be given for thequestion-and-answer session. As a reminder, this conference is being recorded October 29, 2007.
I would now like to hand the conference call to Ms. Noga Fisher.Ms. Fisher, would you like to begin?
Thank you very much, and thank you all for joining us. Withme today are RADCOM's CEO Mr. David Ripstein and CFO Jonathan Burgin. By now,we assume you’ve seen the earnings release, which was issued earlier thismorning. It is available on all the major financial news feeds.
Before we begin, I’d like to review the Safe Harbor provision. Forward-lookingstatements 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 effects ofthe company's accounting policies, and other risk factors detailed in thecompany's SEC filings.
In this conference call, management will be referring tocertain non-GAAP financial measures, which are provided to enhance the user'soverall understanding of the company's financial performance. By excludingcertain non-cash charges, non-GAAP results provide information that is usefulin assessing RADCOM's core operating performance and in evaluating andcomparing its results of operations on a consistent basis from period toperiod.
The presentation of this additional information is not meantto be considered a substitute for the corresponding financial measures preparedin accordance with Generally Accepted Accounting Principles.
Investors are encouraged to review the reconciliation’s ofGAAP to non-GAAP financial measures, which are included in the press release.The company does not take to update forward-looking statements.
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. Ourresults for the third quarter were still weak, below where we wanted them tobe. Still, I want to assure you that all of our efforts are focused on movingus forward from this point to profitability.
During the past two quarters since I took over as CEO, wehave been carrying out a range of activities designed to return us toprofitability. The two most important are programs for streamlining ourexpenses and improving our sales infrastructure.
During this call, I would like to share with you the detailsof these two programs and then to elaborate on our business opportunities. So,in less than 15 minutes, each of you will have a better understanding of how weintend to return the company to profitability in the fourth quarter.
I will start with our program for streamlining expenses. Toaccelerate our return to profitability, we have implemented a cost-cuttingprogram. The main component was a 23% reduction of the workforce. This was apainful process, but necessary at this stage.
At the same time, we made structural changes throughout theorganization to maintain our sales and customer focus. As you can see in ourresults, the program has already begun to reduce our expenses, but we will seethe full benefit in the first quarter of 2008.
Our second program includes activities that are improvingour sales infrastructure. It includes two parallel halves: expanding our salespipeline and upgrading our sales channels. We have been successful in both ofthese efforts.
First, we have expanded the sales pipeline substantially.There is no magic in the method. We used just solid, systematic work with ourexisting customers and potential customers. With existing customers, we’ve beenworking to increase our usage of power systems. This increased theirsatisfaction with our products and creates opportunities for sales.
In addition, we have been working hard to locate newprospects throughout the world. This has been very successful in growing theirsales pipeline and we're now working on a number of mid-sized deals for shortto medium-term.
For us, a mid-sized deal is in the neighborhood of $0.5million to $1 million. We expect to see results during the quarters ahead,beginning in the fourth quarter. Our program to improve the salesinfrastructure has a second important aspect, and that is the upgrades of oursales channel.
Few channels used by vendors in our industry, localdistributors, direct sales force and OEM partners. In the past, we’ve operatedmany bigger distributors. This means that the capabilities of our localpartners are critical for our success.
Therefore, one of my first tasks was to evaluate theperformance of our distributors. Based on our analysis, we replaced weakdistributors and tightened our partnership with strong distributors. We've alsosigned new distribution agreements in regions where we were not represented,mainly in the Far East. After the direct sales channel,we have been using our direct sales force for the U.S.and China. Thisis a business decision that reflects the potential of these strategic markets.
However, we see that our distributors and direct sales forcehave been unable to penetrate into certain customers and have not been able toachieve a critical mass of opportunity. We have determined that the best way toovercome this is to open a new dimension to our sales channel and that is theOEM.
The right OEM channel will give us immediate access to newpotential customers worldwide. During the third quarter, we located a strongcandidate, a top-tier equipment vendor interested in partnering with us on anOEM basis.
This will significantly improve our ability to close dealswith many additional carriers, and we are very excited by the potential and areexpected to report progress soon. The goal of all of these efforts has been torebuild the company and accelerate our return to profitability.
We've done this by streamlining our expenses, expanding thesales pipeline, and improving our sales channels. The success of theseactivities has positioned us to benefit from our clear product advantage andtechnological advantage, and we're now working to turn it into sales. So,looking to the future, I'd like to give you an insight into our businessopportunities and markets.
When we analyze our markets and opportunities, we divide theworld into two markets and four technologies. The two markets are, thedeveloped regions, which include Western Europe and North America, and the emerging regions, which includes Eastern Europe, Latin America and Asia-Pacific.
In the developed regions, operators are now beginning todeploy two new technologies, IMS and IPTV. Projects and service are still inthe initial phase, and execution is not yet happening on a large scale. We'rewell positioned to benefit as this market begins to scale. Our IMS and IPTVsolutions are recognized as unique in the market with a strong technologicaledge that is far ahead of the competition and a multi-technology approach thatgive it a clear return of investment for the customer.
The profile that we seek an initial order from IPTV systemsduring the third quarter from the lab of a Tier 1 European operator gettingready to roll out IPTV services. The timing of this sale is in line with ourprediction, and we expect IMS and IPTV to become an important growth driver bythe middle of 2008.
In the emerging regions, the technologies that operators aredeploying include Voice-over-IP and 3G. Although these are new technologies fordeveloping regions, for us they are well known. It is a clear opportunity forRADCOM, and we are ready to turn it into sales. Many of the short-termopportunities in the sales pipeline are mid-sized deals, especially in Latin America.
For example, today we announced an Omni-Q sale to Telecom Argentina.This deal was a good example of the strategy that we are successfully executingin Latin America. Most of the changes that we've madewith our local distributors, and most of the new distribution agreements thatwe have signed, have been in emerging regions.
In addition, we see these regions as the initial penetrationpoint for the OEM partnership that we are pursuing. In conclusion, we havereported a sales quarter with weak numbers. But activities we've put into placehave stabilized the company and positioned us to return to profitability andgrowth in the fourth quarter.
To accelerate our return to profitability, we've implementeda significant cost-cutting program. We have increased our sales pipeline andare now working on many mid-sized opportunities. We are excited about thepotential offered through the OEM channel, and we're pursuing OEM relationshipsto help expand our marketing reach.
Even with some markets moving slowly, we see manyopportunities and are working to turn them into sales. Taken as a whole, we nowhave a much stronger business platform and are on track for achieving a muchstronger and profitable fourth quarter. We're working to achieve our fullpotential in the year ahead.
I will stop here to let Jonathan review the highlights of thefinancials. Then I will come back to take your questions. Jonathan, please.
Thanks, David. Revenues for the quarter were $3 million. AsDavid said, this is still below our expectations. However, it is up 27%compared to the second quarter. Net loss was $2.4 million for the quarter or$0.13 per share. This is an improvement of 32% compared to the second quarter.
About 55% of our sales for the quarter were from wirelineoperators and about 30% from wireless operators. The remaining 15% were fromlabs primarily for the IPTV system we mentioned. The majority of our sales werefrom repeat customers. Geographically, 54% of our sales were from Europe,an additional 32% from North America, and the remaining14% from the rest of the world.
Gross margin for the quarter was 53%, reflecting the lowlevel of sales. This is up from 44% in the second quarter, but our targetremained 68%, which implies an ability to split our fixed costs over a broaderbase of revenues. We expect to return to our normal level in the fourth quarterwhen our revenues return to the normal range.
Our operating expenses for the quarter were just over $4million. We've been reducing our expenses steadily throughout the year. If youlook back at the first quarter, our operating expenses were $4.7 million.
For the second quarter, net of our one-time expense, so thatwe are comparing apples-to-apples, they were $4.4 million. They are now down to$4 million, and with the additional efforts that we're putting into place, weexpect to be able to reduce them by another 10% by the first quarter of 2008.
As our operating expenses go down, we expect the breakevenpoint to go down as well to around $5 million, depending on the mix of sales,the value of the dollar, and other factors.
As you know, the weakness of the dollar works against usbecause most of our salaries are paid in shekel. So a reduction in the value ofthe dollar increases our shekel expenses as expressed in dollar terms.
Turning to the balance sheet, cash and bank deposits were$4.6 million at the end of the quarter. This is obviously lower than where wewould like to be. We expect the cash balance to go down slightly, again in thefourth quarter, reflecting the timing delay between revenue recognition and collections.
As we guided, I would like to reiterate what we said lastquarter, when we temporarily suspended our revenue guidance. Although we stillcannot offer specific guidance, we do continue to expect much stronger revenuesfor the fourth quarter and to return to profitability. Back to you, David.
Thank you, Jonathan. Thank you all for your support and forparticipating in this conference call. With that, we would be happy to takeyour questions. Operator?
Thank you. Ladies and gentlemen, at this time we will beginthe question-and-answer session (Operator Instructions). There are no questionsat this time.
Before I ask Mr. David Ripstein to go ahead with his closingstatement, I would like to remind participants that a replay of this call isscheduled to begin two hours after the Conference.
In the U.S.,please call 1-877-456-0009, inIsrael, pleasecall 03-925-5929, and internationally call 972-39-255-929.
Mr. Ripstein, would you like to make your concludingstatement?
Yes. Thank you all and we will talk to you in next quarter.
With that, we conclude the RADCOM Ltd. third quarter 2007results conference call. Thank you for your participation. You may go ahead anddisconnect.
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