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Radcom Ltd. (NASDAQ:RDCM)

Q4 2007 Earnings Call

February 4, 2008 9:00 amET

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 theRadcom fourth quarter 2007 results conference call. Allparticipants are atpresent in alisten only mode. Following management’sformal presentation instruction will begiven for the questionand answer session. As areminder, this conference is being recorded February 4, 2008. I would now hand over thecall to Ms. [Nova Fischer]

[Nova Fischer]

Thank you very much and thank you allfor joining us. With metoday are Radcom’s CEODavid Ripstein and CFO Jonathan Burgin. By now we assume you have seen theearnings press release which was issued earlier this morning. Itis available on all themajor financial newsfeeds. Before we begin I’d like toreview the Safe Harborprovision. Forward-looking statements inthe conference callinvolve a number ofrisks and uncertainties including but not limited to product demand, pricing,market acceptance, changingeconomic conditions, product technology development, theeffect of thecompany’s accounting policies and other risk factors detailed inthe company’s SECfilings. Inthis conference call management will bereferring to certain non-GAAP financial measures which areprovided to enhance theusers overall understanding of thecompany’s financial performance. Byexcluding certain non-cash charges non-GAAP results provide information that isuseful in assessingRadcom’s coreoperating performance and inevaluating and comparing our results of operation on aconsistent basis from period to period. Thepresentation of this additional information is not meant to beconsidered asubstitute to thecorresponding financial measures prepared inaccordance with generally accepted accounting principles. Investors areencouraged to review thereconciliation of GAAP to non-GAAP financial measures which areincluded in this pressrelease. Thecompany does not undertake to update forward-looking statements.

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

David Ripstein

Thank you allfor joining us today. We arevery pleased to report significant improvement inour revenue and areturn to breakeven for thefourth quarter. Our sales arejust under $5 million which is up 62% compared to thethird quarter. We have posted aslight profit which is significant improvement compared to thethird quarter of 2007 and thefourth quarter of 2006 both of which had losses. This is improved results inline with the goals ofthe turnaround planthat we have been following for thepast four months. Infact, this is anexciting time for us we arehalf way through our turnaround plan aprocess during which we have beat improve our sales infrastructure, cutexpenses, increased repeat sales and expanded our pipeline of newopportunities. Inparallel we have recently closed a$2.5 million pipe transaction which improved our balance sheet and our abilityto do business. This effort hasgiven us control over thecompany and set us on apath of cause.

Our task inthe year ahead is tokeep our hands firmly on thesteering wheel holding steady as we moveout into open waters [inaudible] instore and burn as brightly ahead. Webelieve that our strong coreassets, our strong technology, customer base and especially our great team willenable us to achieve our potential. I’dlike to take advantage of this call to give you details regarding our progressand then to speak more about our business opportunity. Amajor goal of our turnaround plan hasbeen to improve our sales infrastructure. We have worked to improve thesatisfaction of existing customers, build our sales organization and[inaudible] and build out thesales pipeline. We arepleased with our progress ineach of these areas.

First, we have focused on improving customer satisfactionwhich his actually very hard to achieve inthe network monitoringbusiness. This is because of thetechnology challenges inmonitoring multiservice, multi technology, interconnected networks especially inhigh traffic environments. Itis fair to say that allother vendors in ourmarket are strugglingwith this. As part of our [inaudible] wetook the decision to benumber one in customersatisfaction and to use that as thebasis for penetrating our competitors install base. This is also theway to achieve repeat sales from our existing customers and therefore that isalways easier than winning anew customer. Infact, our focus on customer satisfaction is paying off with ahigher level of repeat orders as well as reduced resistance.

Another way inwhich we are building thebusiness is by extending our solution [inaudible] with additional softwarebased applications. This applicationsextend the value of thedata already collected by our system and therefore theoverall value to our customer. Forexample, we have built aspecial solution for monitoring thequality of [inaudible] services. What wedo is to present thedata in away that highlights theproblem that need to befixed to be ensure ahigh quality ordering experience. [Inaudible] thehigh margin service this application means securing increased revenue andprofits positioning us with aclear return on investment for thecarrier.

Also, our [inaudible] production during thepast quarter we filled out our internal organization including theaddition of new staff manager for AsiaPacific and Eastern Europe. We alsoflattened out theoverall structure of thesales organization. As I mentioned inthe last conferencecall we continue to work on building OEM relationships with top tierequipment members. This will help usfurther increase our pipeline.

With astrong sales organization and good reference account, we arenow strongly focused on closing deals inthe sales pipelinewhile also adding new opportunities. AsI have said in thepast, there is no magic inthe methods that we areusing just solid systematic work that we seeis bringing results. Itwill take time and effort but we aremaking progress.

I’d like to finish up my part of thecall by giving you anupdate regarding our market and business opportunities. As I explained last quarter we seethe world interms of two markets and four technologies. Undeveloped regions including Western Europe and North America areour targets for IMS and IPTV solutions and emerging regions which includeEastern Europe, Latin America and AsiaPacific are ourtargets for voice over IPand [3G] solutions. IMS deployments arenow beginning to materialize. Atthis stage we seeitems of IMS deployment where carriers areusing IMS as the basisfor voice over IP andother services. Our place inthis is to monitor thequality of theservices and to help transition thenetwork. Thefact that our product can support both legacy end of service and nextgeneration voice over IPnetwork and IMS enables us to offer avery strong solution for this market. Webelieve it will becomeone of our growth engines for 2008 and 2009.

IPTV is still alonger term opportunity. First, manymarkets do not yethave the regulationsthat permit it beforeIPTV services can begin. Inaddition, we see thatmany carriers arehesitating before they moveinto this new area. We arekeeping close tabs on themarket and will keep you informed of as itdevelops. Theemerging regions which areonly now deploying large scale voice over IPand [3G] networks offer us alot of good, immediate opportunity. We arecurrently working to close anumber of these especially Latin America. As always, thesales cycle of any one deal can belong soit will take time but,we are moving inthe rightdirection.

Sothat’s it for thefourth quarter. Insummary, we are halfway through theturnaround and as aresult we now have astrong hand on therudder and are movingon a path ofcourse. As projected, we have returnedto top line growth and breakeven. Oursales are being drivenby improved customer satisfaction which hasbeen one of the keygoals of our efforts. Thejob ahead is to turn our sales pipeline into sales and we aretotally focused on making that happen. Theentire team is motivated and working to achieve thecompany’s full potential. We lookforward to reporting to you our progress inthe year ahead.

I will stop here to let Jonathan review thehighlights of thefinancials. Then, I will come back totake your questions.

Jonathan Burgin

Revenues for thequarter were $4.9 million. As Davidsaid, this is up 62% compared to thethird quarter and double as compared to thesecond quarter. Thehigher revenues combined with thecost cuts that we hadput into place during theyear enabled us to record aslight net profit of $52,000 for thequarter. About 65% of our sales for thequarter were from wired line operators and about 30% from wirelessoperators. Theremaining 5% was from [inaudible]. Themajority of our sales were from repeat customers. Geographically, 33% of our sales were fromEurope, 30% from North America, 23% from South America and theremaining 14% were from therest of the world,mainly the FarEast.

We arevery pleased to see anincrease in sales fromNorth America, this is mainly attributable to thecustomer satisfaction efforts that David mentioned earlier. Gross margin for thequarter was very strong, 75%. Thisreflects a onetime adjustmentmade to our provision for warranty liability following thecost cutting programwhich reduced our costbase. Excluding this onetime affect,gross margin would have been 69% which is right inthe middle of ourtarget range of 69 to 70%. As always, theexact number will vary from quarter-to-quarter depending on themix of sales.

Operating expenses for thequarter were $3.7 million. This includesthe full effect of ourcost cutting programwhich we were able to achieve alittle ahead of schedule. Ingeneral, we have been reducing our expenses steadily throughout theyear from $4.7 million inthe first quarter to thecurrent level of $3.7 million. As youknow the Shekel Dollarexchange ratehas changedsignificantly over thepast few months. Because most of oursalaries are paid inShekels a reduction inthe value of thedollar increases our Shekel expenses as expressed indollar terms. Thefact that the exchangerate hascontinued to slide in thelast few weeks makes itdifficult to predict exactly what our expenses will begoing forward and therefore to predict our breakeven point for thefirst quarter.

Turning to thebalance sheet cash and bank deposits were $3.8 million atthe end of thequarter. This does not include the$2.5 million pipe which closed last week atthe end ofJanuary. DSO’s aredown significantly for thequarter standing at122 days at theend of the year. This reflects our successful collectionefforts which wasn’t [inaudible] by ahigher level of customer satisfaction. As to guidance, we arenot able to give specific numbers atthis time however, we expect for 2008 to bemuch better than 2007 both interms of the top lineand the bottomline. Allof our efforts arefocused on making this happen. Back toyou David.

David Ripstein

Before taking your questions, I’d like to thank you allour business partners, shareholders and employees for your support and forparticipating in thisconference call. With that we’d behappy to take your questions.

Question-and-AnswerSession

Operator

Ladies and gentlemen atthis time we’ll begin thequestion and answer session. (OperatorInstructions) Thefirst question is from [Jeff Mary] with Copia Capital Partners. Please go ahead.

[Jeff Mary] – CopiaCapital Partners

My first question is maybe if you can talk alittle bit about thegrowth in thepipeline both sequentially and also year-over-year?

David Ripstein

We seegrowth especially in theemerging markets which is part of thenew strategy that we defined its [inaudible] regions that we didn’t have anypipeline and now we have opportunities that aregoing to stage of matureness. Ingeneral, this is what we seein emergingmarkets. InEurope and North America we didn’t recognize thegrowth yet. Theonly thing that we believe will deliver high growth on thepipeline will be theIMS and this is thearea that we arefocusing now in Europeand North America.

[Jeff Mary] – CopiaCapital Partners

How fastwould you say themarket is growing for your type of equipment?

David Ripstein

According to thenumbers that we know, thearea of growth is 6%. This is awell known numbers from themarket from research. We arefocusing more on thenext generation of this market and we believe that this part of themarket is growing faster.

[Jeff Mary] – CopiaCapital Partners

What about interms of your products, arethere any new products coming out? Or,is it pretty much thesame products you’ve had and just trying to sell them more thoroughly?

David Ripstein

There aretwo dimension of theproducts improvement that we aredoing. One dimension, as I mentioned inthe conference call isadding application above our solution. Still today, we need to give our customer reports and then they shouldtake those reports and understand thenetwork problem and thenetwork trends, thenetwork performance and theneed to process from this point. We aretaking the solutionanother step and we aretrying to give application which gives them theservice of understanding thevalue of their services sothey will not have to dig down into thedata and into thebasic report to learn about thenetwork. We believe that those applications on one side bring value to thecustomer, they also application [inaudible] based sothat we know that themarket and thecustomer have the willto pay for them. This is thegrowth engine especially for theinstalled base that we have. This is theone side. Theother side is in theproducts arena and we aremaking progress inenabling technologies which arethe IMS and IPTV andwe believe we have aleading position in theway that we aremonitoring IMS and IPTV network. Thesituation in themarket now that we’re seeing IMS and IPTV, IMS is alittle bit more mature and we seetrials and also networks that started to rollout IMS activity and then we seea need for oursolutions and a goodfeedback that we gethere today.

[Jeff Mary] – CopiaCapital Partners

Thelast question is on theOEM side of things. Who areyour big OEMstoday? And, who I guess areyou trying to work with inorder to bring on line?

David Ripstein

Well, we aretargeting vendors and we believe we can provide vendors inthe market value byadding our products to their solutions. Inthis stage I cannot share with you any more details about itand I promise to report inthe moment that wehave something to report and also thepermission of thepartner.

Operator

(Operator Instructions) Please stand by as we poll for more questions. There areno further questions atthis time. Before I ask Mr. DavidRipstein to go ahead with his closing statements I would like to remind youthat the replay ofthis call is scheduled to begin two hours after theconference. Inthe US please call1-888-295-2634, inIsrael please call 039255921, internationally call 97239255921. Mr. Ripstein would you like to make aconcluding statement.

David Ripstein

Aspecial thanks to allof you for your support and for your participation inthis conference call.

Operator

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

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Source: Radcom Q4 2007 Earnings Call Transcript

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