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Radcom Ltd. (NASDAQ:RDCM)

Q3 2007 Earnings Call

October 29, 2007 9:00 am ET

Executives

Noga Fisher - Investor Relations

David Ripstein - Chief Executive Officer

Jonathan Burgin - Chief Financial Officer

Operator

Welcome to the RADCOM Limited third quarter 2007 results conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-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?

Noga Fisher

Thank you very much, and thank you all for joining us. With me 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 this morning. It is available on all the 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, changing economic conditions, product technology development, the effects of the company's accounting policies, and other risk factors detailed in the company's SEC filings.

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 its 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 reconciliation’s of GAAP 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.

David Ripstein

Thank you, Noga, and thank you all for joining us today. Our results for the third quarter were still weak, below where we wanted them to be. Still, I want to assure you that all of our efforts are focused on moving us forward from this point to profitability.

During the past two quarters since I took over as CEO, we have been carrying out a range of activities designed to return us to profitability. The two most important are programs for streamlining our expenses and improving our sales infrastructure.

During this call, I would like to share with you the details of 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 we intend to return the company to profitability in the fourth quarter.

I will start with our program for streamlining expenses. To accelerate our return to profitability, we have implemented a cost-cutting program. The main component was a 23% reduction of the workforce. This was a painful process, but necessary at this stage.

At the same time, we made structural changes throughout the organization to maintain our sales and customer focus. As you can see in our results, the program has already begun to reduce our expenses, but we will see the full benefit in the first quarter of 2008.

Our second program includes activities that are improving our sales infrastructure. It includes two parallel halves: expanding our sales pipeline and upgrading our sales channels. We have been successful in both of these efforts.

First, we have expanded the sales pipeline substantially. There is no magic in the method. We used just solid, systematic work with our existing customers and potential customers. With existing customers, we’ve been working to increase our usage of power systems. This increased their satisfaction with our products and creates opportunities for  sales.

In addition, we have been working hard to locate new prospects throughout the world. This has been very successful in growing their sales pipeline and we're now working on a number of mid-sized deals for short to medium-term.

For us, a mid-sized deal is in the neighborhood of $0.5 million to $1 million. We expect to see results during the quarters ahead, beginning in the fourth quarter. Our program to improve the sales infrastructure has a second important aspect, and that is the upgrades of our sales channel.

Few channels used by vendors in our industry, local distributors, direct sales force and OEM partners. In the past, we’ve operated many bigger distributors. This means that the capabilities of our local partners are critical for our success.

Therefore, one of my first tasks was to evaluate the performance of our distributors. Based on our analysis, we replaced weak distributors and tightened our partnership with strong distributors. We've also signed 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. This is a business decision that reflects the potential of these strategic markets.

However, we see that our distributors and direct sales force have been unable to penetrate into certain customers and have not been able to achieve a critical mass of opportunity. We have determined that the best way to overcome this is to open a new dimension to our sales channel and that is the OEM.

The right OEM channel will give us immediate access to new potential customers worldwide. During the third quarter, we located a strong candidate, a top-tier equipment vendor interested in partnering with us on an OEM basis.

This will significantly improve our ability to close deals with many additional carriers, and we are very excited by the potential and are expected to report progress soon. The goal of all of these efforts has been to rebuild the company and accelerate our return to profitability.

We've done this by streamlining our expenses, expanding the sales pipeline, and improving our sales channels. The success of these activities has positioned us to benefit from our clear product advantage and technological 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 business opportunities and markets.

When we analyze our markets and opportunities, we divide the world into two markets and four technologies. The two markets are, the developed 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 to deploy two new technologies, IMS and IPTV. Projects and service are still in the initial phase, and execution is not yet happening on a large scale. We're well positioned to benefit as this market begins to scale. Our IMS and IPTV solutions are recognized as unique in the market with a strong technological edge that is far ahead of the competition and a multi-technology approach that give it a clear return of investment for the customer.

The profile that we seek an initial order from IPTV systems during the third quarter from the lab of a Tier 1 European operator getting ready to roll out IPTV services. The timing of this sale is in line with our prediction, and we expect IMS and IPTV to become an important growth driver by the middle of 2008.

In the emerging regions, the technologies that operators are deploying include Voice-over-IP and 3G. Although these are new technologies for developing regions, for us they are well known. It is a clear opportunity for RADCOM, and we are ready to turn it into sales. Many of the short-term opportunities 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 executing in Latin America. Most of the changes that we've made with our local distributors, and most of the new distribution agreements that we have signed, have been in emerging regions.

In addition, we see these regions as the initial penetration point for the OEM partnership that we are pursuing. In conclusion, we have reported a sales quarter with weak numbers. But activities we've put into place have stabilized the company and positioned us to return to profitability and growth in the fourth quarter.

To accelerate our return to profitability, we've implemented a significant cost-cutting program. We have increased our sales pipeline and are now working on many mid-sized opportunities. We are excited about the potential offered through the OEM channel, and we're pursuing OEM relationships to help expand our marketing reach.

Even with some markets moving slowly, we see many opportunities and are working to turn them into sales. Taken as a whole, we now have a much stronger business platform and are on track for achieving a much stronger and profitable fourth quarter. We're working to achieve our full potential in the year ahead.

I will stop here to let Jonathan review the highlights of the financials. Then I will come back to take your questions. Jonathan, please.

Jonathan Burgin

Thanks, David. Revenues for the quarter were $3 million. As David 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 wireline operators and about 30% from wireless operators. The remaining 15% were from labs primarily for the IPTV system we mentioned. The majority of our sales were from repeat customers. Geographically, 54% of our sales were from Europe, an additional 32% from North America, and the remaining 14% from the rest of the world.

Gross margin for the quarter was 53%, reflecting the low level of sales. This is up from 44% in the second quarter, but our target remained 68%, which implies an ability to split our fixed costs over a broader base of revenues. We expect to return to our normal level in the fourth quarter when our revenues return to the normal range.

Our operating expenses for the quarter were just over $4 million. We've been reducing our expenses steadily throughout the year. If you look back at the first quarter, our operating expenses were $4.7 million.

For the second quarter, net of our one-time expense, so that we 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, we expect to be able to reduce them by another 10% by the first quarter of 2008.

As our operating expenses go down, we expect the breakeven point 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 us because most of our salaries are paid in shekel. So a reduction in the value of the 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 we would like to be. We expect the cash balance to go down slightly, again in the fourth quarter, reflecting the timing delay between revenue recognition and collections.

As we guided, I would like to reiterate what we said last quarter, when we temporarily suspended our revenue guidance. Although we still cannot offer specific guidance, we do continue to expect much stronger revenues for the fourth quarter and to return to profitability. Back to you, David.

David Ripstein

Thank you, Jonathan. Thank you all for your support and for participating in this conference call. With that, we would be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session (Operator Instructions). There are no questions at this time.

Before I ask Mr. David Ripstein to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the Conference.

In the U.S., please call 1-877-456-0009, inIsrael, please call 03-925-5929, and internationally call 972-39-255-929.

Mr. Ripstein, would you like to make your concluding statement?

David Ripstein

Yes. Thank you all and we will talk to you in next quarter.

Operator

With that, we conclude the RADCOM Ltd. third quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.

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