RADCOM Ltd (NASDAQ:RDCM) Q2 2022 Earnings Conference Call August 10, 2022 8:00 AM ET
Company Participants
Eyal Harari – CEO
Hadar Rahav – CFO
Conference Call Participants
Alex Henderson – Needham and Company
Arjun Bhatia – William Blair
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Results Conference Call for the Second Quarter of 2022. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on the company’s website at www.radcom.com later today.
On the call are Eyal Harari, RADCOM’s CEO; and Hadar Rahav, RADCOM’s CFO. Please note that management has prepared a presentation for your reference that will be used during the call. If you have not downloaded it yet, you may do so through the link in the Investors section of RADCOM’s website at www.radcom.com/investor-relations.
Before we begin, I would like to review the safe harbor provision. Forward-looking statements in the conference call involve several risks and uncertainties including but not limited to the company’s statements about its full year 2022 revenue guidance, expected growth in 2023, expectations regarding the enterprise market for telecom operators, continued investment in benefits from research and development, its expectation to gain further interest from operators and play an important role in facilitating the transition to 5G, its expectations about its pipeline and momentum, further demand for its products and growth, levels of expenses and keeping them below revenues, the potential for additional multiyear contracts, engagements and expansion of opportunities, the company’s expectations with respect to its relationships with Rakuten and AT&T and potential grants from the Israel Innovation Authority. The company does not undertake to update forward-looking statements. The full safe harbor provisions, including risks that could cause actual results to differ from these forward-looking statements, are outlined in the presentation and 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 noncash stock-based compensation expenses, non-GAAP results provide information helpful in assessing RADCOM’s core operating performance and evaluating in comparing the results of operations consistently 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 reconciliations of GAAP to non-GAAP financial measures included in the quarter’s earnings release available on our website.
Now I would like to turn over the call to Eyal. Please go ahead.
Eyal Harari
Thanks, operator. Good morning, everyone, and thank you for joining us for our second quarter 2022 earnings call. We achieved another strong quarter with solid financial results. Also, as recently announced, we won 2 new 5G assurance contracts and extended our multiyear agreement with AT&T. Total revenue for the second quarter was $11.1 million, representing a 12th consecutive quarter of year-over-year revenue growth, up 14% in compared to the second quarter of 2021.
I am pleased with the strong demand for our innovative solutions as we win new customer logos and expand business with our installed base. The 5G market is ramping up, reflected in the momentum of our business. In the first 6 months of 2022, revenue grew by over 15% compared to the first 6 months of 2021. With the growth in our business and the efficient management of cost, we have generated over $3 million in cash since the beginning of 2022, resulting in cash and short-term deposits reaching $73.1 million, a 4-year high. Since the beginning of the year, we have been at breakeven point, and we believe the positive momentum will continue into the year second half.
As we announced in May, DISH selected RADCOM to monitor America’s first 5G smart network. It started its nationwide rollout in May, launching in Las Vegas. After a month of testing, DISH’s 5G network was made available to the public in over 120 U.S. cities, covering 20% of the U.S. population. We feel proud to be DISH’s assurance partner as they roll out their 5G network. DISH chose RADCOM ACE to monitor their stand-alone 5G network, the first fully deployed on the public cloud. RADCOM was selected because DISH wanted a best-in-class assurance solution that seamlessly integrates into the cloud and provides network-wide visibility.
Our previous R&D investment with partners like AWS to integrate RADCOM ACE with the public cloud providers have borne fruit. Our integration with AWS enables DISH to use AWS Cloud along with RADCOM ACE to simplify 5G rollout and smartly manage the network services more automatically. As DISH move forward with its nationwide rollout, it is expected to have more flexibility and capabilities to be leveraged to generate new revenue.
In a recent Analyst Day hosted by DISH, they stated that the enterprise will be significant opportunity for retaining new revenue streams with its smart 5G cloud platform. DISH can offer enterprise customers different flavors of private networks for advanced 5G connectivity and services. This is where our cloud assurance technology can help. DISH can offer enterprise customer our assurance solution to monitor these private networks to ensure service quality and certify SLAs. As a result, they could provide Service Assurance as a Service as part of their managed service to the enterprise. We believe the enterprise market for telecom operators has enough potential with operators taking the 5G cloud and selling premium services for new revenue across multiple verticals.
We also announced a new multiyear 5G assurance contract win with a European mobile network. This new order covers assurance for this European operator’s 5G network. RADCOM ACE will enable the operator to monitor its end-to-end 5G network performance and provide end-to-end visibility that helps the operator make real-time, data-driven decisions and proactively improve its network performance, ensuring top-quality services are delivered to its customers. We are excited about these new wins and the progress we are making in integrating our assurance solutions into these networks.
Like with DISH, we continue seeing lots of collaboration between telecom operators and public cloud providers like Amazon Web Services. For example, Telefónica Brazil recently validated AWS as an option for their 5G SA core. Telefónica wants to increase automation and drive new revenue with cloud-based 5G platforms.
The ease of use and speed which operators can roll out new network and services with these public cloud providers continues to gain traction, reflected in recent cloud providers’ earnings results that have beaten analyst expectations. We believe that our integration into several cloud providers will continue generating additional opportunities. In addition, we will continue working with technology partners to integrate RADCOM ACE with other platforms to help operators manage the complexity of launching 5G and ensuring the customer experience.
Last month, we announced RADCOM ACE integration into another cloud platform. Rakuten Symphony selected our cloud assurance technology as its service assurance solution that will be globally available in their Symworld marketplace. Rakuten Symphony is the business dedicated to selling the Rakuten Communications Platform and managed services to telecom operators worldwide. Symworld provides the single platform which includes all the application, cloud and operational data that telecom operators need to run their networks more efficiently and launch services fast.
Making RADCOM ACE available in the Symworld marketplace with easy click and deploy access will increase our solution availability and comes with built-in workflows and unified data analytics to help more operators rapidly deploy and roll out 5G with Rakuten Symphony. We believe that being part of this platform will open significant opportunities for us in the future.
We remain confident that our product offerings are best-in-class and will play an essential role in the 5G transformation as more opportunities evolve. We continue to enhance our software solution with expanded automation and intelligence AI-based capabilities to bring value to our customers as they roll out 5G and move to launch advanced services. In addition, we are working with the Israel Innovation Authority and academic institutions to push cutting-edge technology forward with the telco space.
Our solution automatically analyzes millions of user sessions in real-time and reveals underlying faults that otherwise will be unlikely to be identified quickly in 5G networks. Furthermore, with the amount of data crisscrossing the network increasing monthly, our solution continually evolves to help operators overcome the challenges of operating complex network to ensure the quality of services.
As we grow the business, we maintain our laser focus on retaining and nurturing top talent. Our employee retention efforts are bearing fruit as we have kept similar headcount since the beginning of the year. We place a high priority on creating the culture that fosters success for our employees. We aim to provide attractive career paths and promote internal talent. Our team is composed of talented people with unique knowledge and expertise driving our success. I wish to take this opportunity to thank all of RADCOM employees as they continue to help us meet our business commitments.
The strong demand for RADCOM ACE and the 5G market ramp-up is reflected in the momentum of our business and our healthy pipeline opportunities. We are engaged with operators worldwide, looking to provide their customers with exciting new 5G services and use our solutions to make their network more intelligent and automated. As a result, we see the number of engagements, the level of engagement and RADCOM win rates very positively. At the same time, we continue to manage our expenses while investing in the business strategically and efficiently.
To summarize, I am pleased with our performance in the second quarter. Revenues are up and our bottom line continues to improve. We see solid demand for our solutions and remain focused on executing our strategy as more operators transition to 5G and look for innovative assurance solution to support their network transformation. As a result, we remain confident in our business strategy and the role we expect to play in the 5G evolution.
Thanks to the recent wins, our growing business in our installed base and our ongoing sales engagement, we have good visibility and we are raising our revenue guidance to $45 million to $48 million, a second consecutive rise this year. We believe this accelerated momentum will continue into 2023 to deliver a fourth successive year of growth.
With that, I would like to turn the call over to Hadar Rahav, our CFO, who will discuss the financial results in detail.
Hadar Rahav
Thank you, Eyal, and good morning, everyone. Now please turn to Slide 8 for our financial highlights. To help you understand the results, I will refer mainly to non-GAAP numbers, which exclude share-based compensation.
We ended the second quarter of 2022 with $11.1 million in revenue, increasing from $9.8 million in the second quarter of 2021. At the same time, as we increased revenue by over 14%, we managed costs and maintain the same operational expenses as in the second quarter of 2021. This contributed to us reaching a breakeven point and improving the bottom line.
Our gross margin in the second quarter of 2022 on a non-GAAP basis was 72%. Please note that our gross margin can fluctuate depending on the revenue mix. We are pleased with our consistent growth trend and believe the positive momentum will continue into the year second half.
Our gross R&D expenses for the second quarter of 2022 on a non-GAAP basis were $4.7 million, a decrease of $196,000 compared to the second quarter of 2021. We received a grant of $197,000 from the Israel Innovation Authority during the quarter compared to $70,000 in the second quarter of last year. As a result, our net R&D expenses for the second quarter of 2022 on a non-GAAP basis were $4.5 million compared to $4.8 million in the second quarter of 2021. We expect the Israel Innovation Authority grant in the third quarter to be a similar level as in the second quarter.
Sales and marketing expenses for the second quarter of 2022 were $2.5 million on a non-GAAP basis, an increase of $221,000 compared to the second quarter of 2021. G&A expenses for the second quarter of 2022 on a non-GAAP basis were $841,000 as well as in the second quarter of 2021.
Operating income on a non-GAAP basis for the second quarter of 2022 was $176,000 compared to an operating loss of $646,000 for the second quarter of 2021. Net income for the second quarter of 2022 on a non-GAAP basis was $50,000 or a net income of less than $0.01 per diluted share compared to a net loss of $304,000 or a net loss of $0.02 per diluted share for the second quarter of 2021. The positive net income was due to the increase in revenue and the decrease in operating expenses, offset by the unfavorable impact of change in foreign exchange rates.
On a GAAP basis, as you can see on Slide 7, our net loss for the second quarter of 2022 was $1.2 million or a net loss of $0.09 per diluted share compared to a net loss of $1.1 million or a net loss of $0.08 per diluted share for the second quarter of 2021. At the end of the second quarter of 2022, our headcount was 284.
Turning to the balance sheet. As you can see on Slide 11, our cash, cash equivalents and short-term bank deposits as of June 30, 2022 was $73.1 million.
That ends our prepared remarks. I will now turn the call back to the operator for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Alex Henderson from Needham & Company.
Alex Henderson
Congratulations on being able to raise the guide. So nice progress. I think I pretty much know the answer to this, but I’m going to ask it anyway just to be sure. It sounds like your level of visibility, the number of deals that you’re chasing, the degree to which those are progressing is improving despite the economic conditions. Can you confirm that there’s no impact from the macro environment based on the strategic importance of these projects, that you’re fairly well insulated from that?
Eyal Harari
Alex, thank you for your kind words. Yes, our improved results and our overall execution is based on our recent and our positive momentum with our new and existing customers. As we have continued to be focused on our projects and transformation to 5G networks, we don’t currently see any impact from the global economic environment. We continue to see demand for our solution and we continue to see operators invest in the migration of their networks to 5G.
Alex Henderson
On a similar vein, can you just remind me, I believe you price in dollars globally. Is that still accurate?
Eyal Harari
Sorry, can you repeat?
Alex Henderson
Yes. I believe you price in dollars globally. Is that accurate?
Eyal Harari
Yes, yes. Our — main part of our business is based on dollar. And we do have some opportunities or business that are in foreign exchange, but the vast majority is in dollar.
Alex Henderson
So do you have any ForEx risk to the revenue base that we should be aware of?
Eyal Harari
No. I think it’s a marginal effect. Our key accounts and our largest contracts are with — in U.S. dollar, and we do not anticipate any fluctuations due to foreign exchange.
Alex Henderson
And conversely, if I look at your operating structure, you — as I recall, you don’t hedge the shekel, correct?
Eyal Harari
Correct.
Alex Henderson
So the shekel has obviously moved quite sharply against the dollar. It’s down a little bit, but it’s still down substantially year-over-year. At these levels, how much of the — positive is that relative to your cost structure?
Eyal Harari
So yes, we do not hedge, and we did have some benefit of the weakening of the shekel as part of our expenses there. I believe about 25% of our expense is in shekel, and so I think it’s something like a couple of hundreds of dollars that we gained between the — due to the change.
Alex Henderson
That’s per quarter?
Eyal Harari
Yes.
Alex Henderson
So based on the current environment, with the shekel having fallen considerably, assuming it stays where it is, do you plan to accelerate a little bit of spending? How does that set up probably to the OpEx going forward?
Eyal Harari
So we are — as I mentioned in the previous calls, we are going to maintain our expense level. It might fluctuate a bit because of currency. But overall, we are looking to keep a similar level while increasing a bit our sales and marketing in order to reach more accounts. So any improvement there goes to the bottom line. As we see in this quarter, we managed to create some profit because of these savings in the R&D cost.
Alex Henderson
All right. So can you just give us a little bit of a sense of what you expect in terms of the interest income line? It’s bouncing around all over the place between almost $1 million in the first quarter and a contribution to an expense in the second quarter. What should we be using in the back half of the year? And what should we be using as we go out over time, assuming the exchange rates stay stable at current levels?
Eyal Harari
So in the — I believe that overall we are looking on — expecting a small positive. But you can never know because of the fluctuations of — we have some money not in U.S. dollars, some in shekels, some in other currencies. And the fluctuations are, as you know, not always — are not predictable. But overall, I think in average we are neutral to that. We do see increased interest rates on the cash that we have as the interest rates are going up. So we are expecting to generate some money, but it’s not — I think, something like 2% a year.
Alex Henderson
Right. And then on the tax rate line, just continue around $50,000, $60,000 a quarter kind of thing?
Eyal Harari
Yes.
Alex Henderson
Okay. In terms of the pipeline, it sounds like it’s progressing very well. Do you expect between now and year-end that you’ll have additional meaningful wins that will give you visibility to continuing double-digit growth in 2023 at this point? Or do you think that the environment is such that things have slowed down a little bit and it might be more challenging to achieve that rate of growth in ’23?
Eyal Harari
So we are definitely continuing to engage with multiple opportunities. Some of them are — definitely can close this year and some of the beginning of next year, which will help us to improve our revenue to next year, 2023. As you — as I noted in my prepared remarks, we already have very good visibility into 2023 and we already have — I believe we can have double-digit growth already with the visibility we have today. We still obviously have some things to execute and — between our recent wins and our good progress with our existing accounts. And due to the fact that our business model is, as you know, multiyear recurring, we already have the visibility for double-digit growth for 2023. And we continue to work in order to accelerate that and even higher growth.
Alex Henderson
Just to be clear, you’re not impacted by the number of subscribers in any way. So for instance, Rakuten lowering the number of subscribers that they expected doesn’t have an impact on you, right?
Eyal Harari
We have different business models that — we have some customers that are using what we call pay as you grow. Some are enterprise prices that is not dependent on subscriber. Overall, we have like a minimum spend with most of our accounts with — some of them with additional upside if they grow more than anticipated.
Operator
The next question is from Arjun Bhatia of William Blair.
Arjun Bhatia
Congrats on a good quarter, guys. Can you just talk about this Symworld partnership that you have, getting on their marketplace. What does that do for RADCOM? What kind of operators does that help you reach that you wouldn’t have had access to otherwise? And what kind of contribution should we expect there over the next couple of years?
Eyal Harari
So I would look on that as — we can go by ourselves to any operator globally, but we are today focused on some operators which are most advanced with 5G and in the regions and areas that we feel there is a best fit to — in terms of their maturity and size. Having Rakuten Symphony as a partner is a big benefit for us and a potential growth driver as they are, in parallel, marketing their own telecom stack. And every operator that they are going to be engaged will be a possible upside for us looking into expanding the assurance, which we are today the assurance solution within the stack.
So first, it accelerates our go-to-market efforts. And in some cases, the integrated approach, that our solution is already pre-integrated with a lot of the technology, allow access also smaller carriers that are not always being approached by us. Our focus is more on the Tier 1s. But I would really look on that, that it’s another strategic channel that would — any success of Rakuten Symphony could be a success for us for additional carriers and accelerating our growth.
Arjun Bhatia
And do you have — is there anything that you can disclose just in terms of how the partnership works? If you do — if you are able to get additional carriers that come in there, what are the economics that we should expect that you have with Rakuten as a part of that agreement?
Eyal Harari
So eventually, it’s all — Rakuten are mainly priming the overall solution. And I would look on this kind of like an OEM solution, that we are one of the options within their overall stack. And OEM reselling, that if they are providing their solution, they could then also include our part as part of their overall deal.
Arjun Bhatia
Okay. Got it. Very helpful. And then you talked about a lot of the opportunities that you have further down the road to potentially expand with DISH as that rollout continues. What do you expect in terms of time line from how long those expansion opportunities take to play out? Is this still — is it a multiyear process that we’re talking about? Or is there anything near term that can happen there?
Eyal Harari
So it’s very hard to say. We just announced our win partnering with DISH a few months ago, I think like 2, 3 months ago. So we are now busy on implementing our solution and make sure that DISH get the full benefit of the RADCOM ACE solution to support their 5G launch and build up the network. We are engaged with them closely to make sure we provide most value possible to make them successful. And with this engagement obviously raised additional ideas and capabilities, very hard for me to predict when the upside could come. But we are mainly focusing now on providing them the value out of this multiyear that we — multiyear agreement we signed with them recently.
Arjun Bhatia
Okay. Fair enough. And then last one for me. We did see that the gross margins picked up and there was momentum there. I think you already talked about that as well. What’s the driver there? And how high do you think that can go over time?
Hadar Rahav
Well, we believe that our gross margin will be around the average gross margin that was in 2021, around 72%. And this quarter, the gross margin was 72% due to third-party components. Of course, our gross margin fluctuates depending on the revenue mix.
Operator
Thank you. This concludes RADCOM Second Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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