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Radcom Ltd. (NASDAQ:RDCM)

Q4 2007 Earnings Call

February 4, 2008 9:00 am ET

Executives

David Ripstein – President & Chief Executive Officer

Jonathan Burgin – Chief Financial Officer

Analysts

[Jeff Mary] – Copia Capital Partners

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Radcom fourth quarter 2007 results conference call. All participants are at present in a listen only mode. Following management’s formal presentation instruction will be given for the question and answer session. As a reminder, this conference is being recorded February 4, 2008. I would now hand over the call to Ms. [Nova Fischer]

[Nova Fischer]

Thank you very much and thank you all for joining us. With me today are Radcom’s CEO David Ripstein and CFO Jonathan Burgin. By now we assume you have seen the earnings press 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 inthe 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 inthe company’s SEC filings. In this conference call management will be referring to certain non-GAAP financial measures which are provided to enhance the users 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 operation on a consistent basis from period to period. The presentation of this additional information is not meant to be considered a substitute to the corresponding financial measures prepared in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliation of GAAP to non-GAAP financial measures which are included in this press release. The company does not undertake to update forward-looking statements.

Now, I’d like to turn the call over to David. Go ahead please.

David Ripstein

Thank you all for joining us today. We are very pleased to report significant improvement in our revenue and a return to breakeven for the fourth quarter. Our sales are just under $5 million which is up 62% compared to the third quarter. We have posted a slight profit which is significant improvement compared to the third quarter of 2007 and the fourth quarter of 2006 both of which had losses. This is improved results in line with the goals of the turnaround plan that we have been following for the past four months. In fact, this is an exciting time for us we are half way through our turnaround plan a process during which we have beat improve our sales infrastructure, cut expenses, increased repeat sales and expanded our pipeline of new opportunities. In parallel we have recently closed a $2.5 million pipe transaction which improved our balance sheet and our ability to do business. This effort has given us control over the company and set us on a path of cause.

Our task inthe year ahead is to keep our hands firmly on the steering wheel holding steady as we move out into open waters [inaudible] in store and burn as brightly ahead. We believe that our strong core assets, our strong technology, customer base and especially our great team will enable us to achieve our potential. I’d like to take advantage of this call to give you details regarding our progress and then to speak more about our business opportunity. A major goal of our turnaround plan has been to improve our sales infrastructure. We have worked to improve the satisfaction of existing customers, build our sales organization and [inaudible] and build out the sales pipeline. We are pleased with our progress in each of these areas.

First, we have focused on improving customer satisfaction which his actually very hard to achieve inthe network monitoring business. This is because of the technology challenges in monitoring multiservice, multi technology, interconnected networks especially in high traffic environments. It is fair to say that all other vendors in our market are struggling with this. As part of our [inaudible] we took the decision to be number one in customer satisfaction and to use that as the basis for penetrating our competitors install base. This is also the way to achieve repeat sales from our existing customers and therefore that is always easier than winning a new customer. In fact, our focus on customer satisfaction is paying off with a higher level of repeat orders as well as reduced resistance.

Another way in which we are building the business is by extending our solution [inaudible] with additional software based applications. This applications extend the value of the data already collected by our system and therefore the overall value to our customer. For example, we have built a special solution for monitoring the quality of [inaudible] services. What we do is to present the data in a way that highlights the problem that need to be fixed to be ensure a high quality ordering experience. [Inaudible] the high margin service this application means securing increased revenue and profits positioning us with a clear return on investment for the carrier.

Also, our [inaudible] production during the past quarter we filled out our internal organization including the addition of new staff manager for Asia Pacific and Eastern Europe. We also flattened out the overall structure of the sales organization. As I mentioned inthe last conference call we continue to work on building OEM relationships with top tier equipment members. This will help us further increase our pipeline.

With a strong sales organization and good reference account, we are now strongly focused on closing deals inthe sales pipeline while also adding new opportunities. As I have said in the past, there is no magic inthe methods that we are using just solid systematic work that we see is bringing results. It will take time and effort but we are making progress.

I’d like to finish up my part of the call by giving you an update regarding our market and business opportunities. As I explained last quarter we seethe world in terms of two markets and four technologies. Undeveloped regions including Western Europe and North America are our targets for IMS and IPTV solutions and emerging regions which include Eastern Europe, Latin America and Asia Pacific are our targets for voice over IP and [3G] solutions. IMS deployments are now beginning to materialize. At this stage we see items of IMS deployment where carriers are using IMS as the basis for voice over IP and other services. Our place in this is to monitor the quality of the services and to help transition the network. The fact that our product can support both legacy end of service and next generation voice over IP network and IMS enables us to offer a very strong solution for this market. We believe it will become one of our growth engines for 2008 and 2009.

IPTV is still a longer term opportunity. First, many markets do not yet have the regulations that permit it before IPTV services can begin. In addition, we see that many carriers are hesitating before they move into this new area. We are keeping close tabs on the market and will keep you informed of as it develops. The emerging regions which are only now deploying large scale voice over IP and [3G] networks offer us a lot of good, immediate opportunity. We are currently working to close a number of these especially Latin America. As always, the sales cycle of any one deal can belong soit will take time but, we are moving inthe right direction.

So that’s it for the fourth quarter. In summary, we are half way through the turnaround and as a result we now have a strong hand on the rudder and are moving on a path of course. As projected, we have returned to top line growth and breakeven. Our sales are being driven by improved customer satisfaction which has been one of the key goals of our efforts. The job ahead is to turn our sales pipeline into sales and we are totally focused on making that happen. The entire team is motivated and working to achieve the company’s full potential. We look forward to reporting to you our progress inthe 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 Burgin

Revenues for the quarter were $4.9 million. As David said, this is up 62% compared to the third quarter and double as compared to the second quarter. The higher revenues combined with thecost cuts that we had put into place during the year enabled us to record a slight net profit of $52,000 for the quarter. About 65% of our sales for the quarter were from wired line operators and about 30% from wireless operators. The remaining 5% was from [inaudible]. The majority of our sales were from repeat customers. Geographically, 33% of our sales were from Europe, 30% from North America, 23% from South America and the remaining 14% were from the rest of the world, mainly the Far East.

We are very pleased to see an increase in sales from North America, this is mainly attributable to the customer satisfaction efforts that David mentioned earlier. Gross margin for the quarter was very strong, 75%. This reflects a onetime adjustment made to our provision for warranty liability following thecost cutting program which reduced our cost base. Excluding this onetime affect, gross margin would have been 69% which is right inthe middle of our target range of 69 to 70%. As always, the exact number will vary from quarter-to-quarter depending on the mix of sales.

Operating expenses for the quarter were $3.7 million. This includes the full effect of our cost cutting program which we were able to achieve a little ahead of schedule. In general, we have been reducing our expenses steadily throughout the year from $4.7 million inthe first quarter to the current level of $3.7 million. As you know the Shekel Dollar exchange ratehas changed significantly over the past few months. Because most of our salaries are paid in Shekels a reduction inthe value of the dollar increases our Shekel expenses as expressed in dollar terms. The fact that the exchange rate has continued to slide in the last few weeks makes it difficult to predict exactly what our expenses will be going forward and therefore to predict our breakeven point for the first quarter.

Turning to the balance sheet cash and bank deposits were $3.8 million atthe end of the quarter. This does not include the $2.5 million pipe which closed last week atthe end of January. DSO’s are down significantly for the quarter standing at 122 days at the end of the year. This reflects our successful collection efforts which wasn’t [inaudible] by a higher level of customer satisfaction. As to guidance, we are not able to give specific numbers at this time however, we expect for 2008 to be much better than 2007 both in terms of the top line and the bottom line. All of our efforts are focused on making this happen. Back to you David.

David Ripstein

Before taking your questions, I’d like to thank you all our business partners, shareholders and employees for your support and for participating in this conference call. With that we’d be happy to take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen at this time we’ll begin the question and answer session. (Operator Instructions) The first question is from [Jeff Mary] with Copia Capital Partners. Please go ahead.

[Jeff Mary] – Copia Capital Partners

My first question is maybe if you can talk a little bit about the growth in the pipeline both sequentially and also year-over-year?

David Ripstein

We see growth especially in the emerging markets which is part of the new strategy that we defined its [inaudible] regions that we didn’t have any pipeline and now we have opportunities that are going to stage of matureness. In general, this is what we seein emerging markets. In Europe and North America we didn’t recognize the growth yet. The only thing that we believe will deliver high growth on the pipeline will be the IMS and this is the area that we are focusing now in Europe and North America.

[Jeff Mary] – Copia Capital Partners

How fast would you say the market is growing for your type of equipment?

David Ripstein

According to the numbers that we know, the area of growth is 6%. This is a well known numbers from the market from research. We are focusing more on the next generation of this market and we believe that this part of the market is growing faster.

[Jeff Mary] – Copia Capital Partners

What about in terms of your products, are there any new products coming out? Or, is it pretty much the same products you’ve had and just trying to sell them more thoroughly?

David Ripstein

There are two dimension of the products improvement that we are doing. One dimension, as I mentioned inthe conference call is adding application above our solution. Still today, we need to give our customer reports and then they should take those reports and understand the network problem and the network trends, the network performance and the need to process from this point. We are taking the solution another step and we are trying to give application which gives them the service of understanding the value of their services so they will not have to dig down into the data and into the basic report to learn about the network. We believe that those applications on one side bring value to the customer, they also application [inaudible] based so that we know that the market and the customer have the will to pay for them. This is the growth engine especially for the installed base that we have. This is the one side. The other side is in the products arena and we are making progress in enabling technologies which arethe IMS and IPTV and we believe we have a leading position in the way that we are monitoring IMS and IPTV network. The situation in the market now that we’re seeing IMS and IPTV, IMS is a little bit more mature and we see trials and also networks that started to roll out IMS activity and then we seea need for our solutions and a good feedback that we get here today.

[Jeff Mary] – Copia Capital Partners

The last question is on the OEM side of things. Who are your big OEMs today? And, who I guess are you trying to work with in order to bring on line?

David Ripstein

Well, we are targeting vendors and we believe we can provide vendors inthe market value by adding our products to their solutions. In this stage I cannot share with you any more details about it and I promise to report inthe moment that we have something to report and also the permission of the partner.

Operator

(Operator Instructions) Please stand by as we poll for more questions. There are no further questions at this time. Before I ask Mr. David Ripstein to go ahead with his closing statements I would like to remind you that the replay of this call is scheduled to begin two hours after the conference. Inthe US please call 1-888-295-2634, in Israel please call 039255921, internationally call 97239255921. Mr. Ripstein would you like to make a concluding statement.

David Ripstein

A special thanks to all of you for your support and for your participation in this conference call.

Operator

This concludes the Radcom fourth quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.

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