Radcom Ltd (RDCM) 2003 Q4 法說會逐字稿

Welcome to the RADCOM fourth-quarter earnings release. At this time all participants are in a listen only mode. Later we will open the lines for question and answers. (OPERATOR INSTRUCTIONS). As a reminder this conference will be recorded. At this time I would like to turn the conference over to your host, Noga Fisher (ph). Please go ahead.

Thank you, John, and thank you for joining us today. With me this afternoon are RADCOM's CEO, Arnon Toussia-Cohen, and its CFO, David Zigdon. By now we hope you have all seen the press release. It is available on all the major financial news feeds. Before we begin I would 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 affect of the company's accounting policies, and other risk factors detailed in the company's SEC filing. Now I would like to turn the call over to Arnon. Please go ahead.

Thank you, Noga, and thank you all for joining us. The fourth quarter was a satisfying end to 2003. We are pleased to report our third straight quarter of revenue growth, our lowest net loss in three years and our highest gross margin since 2000. These results reflect strong and growing sales of our new Cellular Performer together with steady sales of the Voice-over-IP performer and Omni-Q voice quality management solution. With higher gross margin and much lower expenses, we were able to slash our quarterly net loss by two-thirds compared to the fourth quarter of 2002, and also compared to the third quarter of 2003.

Though visibility remains too low to make an exact forecast we are optimistic as we look forward. The driver of our improved results is the Cellular Performer. We launched this unique product three quarters ago and it now accounts for about half of our revenue. Because it is so important for our future, I'd like to spend a few minutes giving you some background about its capabilities and marketing solution. The Performer clearly is a PC based system that benefits from our generic GEAR analyzer for (indiscernible) hardware.

GEAR is also (indiscernible) that is designed for testing high-speed links in (indiscernible), online, independent of specific protocols. The Performer is differentiated by its combination of high-performance and easy to use flexible software. So far, we have made sales to some of the largest cellular equipment vendors and seven carriers. This success confirms that we have a window of opportunity for the Cellular Performer sales.

To take full advantage we are working to (indiscernible) two-pronged LAN (ph) that has been successful so far. First, we are working to penetrate each major cellular vendor. We are employing a strategy we call mining the gap. The idea is that each vendor has at least one burning (ph) network program. We look for that problem, solve it and then build incremental sales around the initial sale. This positions us as a valued technology partner leading to additional business over the long-term.

Just as important, each vendor can help us penetrate each customer with service providers. (indiscernible) service providers, we are working closely with our local distributors and are currently in discussion with some 25 service providers. Sales of our other solutions were steady in the quarter and we are actually seeing increased interest in our Voice over IP product line. We believe this is due to the increased mainstream Voice-over-IP deployment.

So far most carry or Voice-over-IP installations are in the early stage, however, Voice-over-IP traffic is building and is likely to lead to the quality challenges we envision when we began developing our comprehensive Voice-over-IP solutions. We believe that sales of these products are likely to rise with in step with the increase of Voice-over-IP traffic.

Taking together sales of our converged network products, the Cellular Performer, the Voice-over-IP performer and the Omni-Q, now accounts for nearly 70 percent of our business. We believe that market trends are working in our favor and we are positioned to continue the growth through 2004. I will stop now to let David go through the financial statements, then I'll come back to summarize and answer your questions. David.

Thank you and hello everyone. Since you have the financial statement in front of you, I will review just the highlights. Revenues for the quarter were $4 million, up by 30 percent compared to the third quarter and 13 percent compared to the fourth quarter of 2002. This was our third quarter of (indiscernible) revenue growth. As Nonie (ph) said, about 50 percent of our sales came from Cellular Performer and the total of about 70 (ph) percent from the new product line. The sales were distributed between old geographic regions. We are especially pleased to report an increase in sales from North America.

A geographic breakdown for the quarter was, 54 percent for North America, 33 percent for Europe and 13 percent from Asia-Pacific. Gross margin for the quarter was 71.8 percent, the highest since 2000 and above our target of 68 percent. The gross profit is affected by several factors and especially the product mix. The gross margin on optional software packaging is higher than on our sales of our other products. Also, we have higher gross margin in North America where we (indiscernible) mostly through manufacturers of (indiscernible) than our sale outside of North America where we sell mostly (indiscernible).

For the year the gross margin was 56 percent compared to 65 percent in 2002. This low margin reflects the inventory rise that we took in the first quarter of 2003. We continue to control all our expenses closely. For the year, total operating expenses are down by 13 percent. R&D expenses are down despite the fact that we continue investing to expand our products. Sales and marketing expenses were up during the quarter reflecting the commissions paid on higher sales. Net loss for the quarter is down by two-thirds to $350,000, or 3 cents per share. This compares to a loss of 10 cents per share for the third quarter of 2003 and also for the fourth quarter of 2002.

Turning to the balance sheet our cash balance is approximately 5.6 million compared to 5.9 million in the end of the third quarter. The market remains too volatile to give exact guidance going forward; however, we see demand in all our markets. For the first quarter of 2004, we expect to see a normal seasonal decline in revenue. We believe we are on track for continued revenue growth and bottom-line improvement in 2004.

One last topic. On January 15th we presented NASDAQ with a plan to re-establish compliance with the listing requirements for the NASDAQ national market. The plan includes our intention to raise funds from private investors. We haven't yet been notified of their decision. Back to you, Nonie.

Thank you, David. So that is it for the quarter, in summary. The Cellular Performer is a success and has driven our improved revenues over the last three quarters. Global Voice-over-IP trends have the power to drive future increase in Voice-over-IP performer and Omni-Q sales. Our two-pronged sales and marketing strategy has been successful. We are working to take full advantage of our Cellular Performer window of opportunity.

Finally, although we cannot predict the exact timing, we believe we are on the road back to profitability and are optimistically looking forward. Thank you for your support and for participating in this conference call. With that we would be happy to take your question. Operator.

(OPERATOR INSTRUCTIONS). Lenny Brecken (ph) from Brecken Capital.

Just to reiterate. You were saying seasonally the next quarter, the first quarter, will be sequentially down? Is that correct?

Correct.

Can you give us an idea, I know you said your visibility is limited, but can you quantify how limited it is in terms of going into this quarter? And a follow-up on the Voice-over-IP product, when do you think capacity will get to a point where a resurgence and sequential growth in that line item would occur? Thanks.

Regarding the forecast, usually we don't have a huge backlog that we are getting into the next quarter and at this point in time the visibility is very limited and so we can't give any guidance for this quarter at this point in time. For the next -- for the Voice-over-IP, I turn the question to Nonie who will answer for you.

It's very difficult really to give an answer. On our short term which I mean about the next two quarters, we didn't take any dramatic (indiscernible) increase. So we believe that it will not happen early, it will not happen in the next two quarters.

After that it is very difficult to really indicate when is exactly the time when we will see the need for the product. We do see however, and that's what we indicated, that there is interest, an increased interest, especially with the Omni-Q which is the monitoring solution from a service provider who is implementing Voice-over-IP.

Thanks.

(OPERATOR INSTRUCTIONS). Bennett Knottman (ph) from Shackle (ph) Capital.

Could you just talk to me a little about, as Voice-over-IP gets more widely deployed, sort of where in the cycle your product comes into play? Do you need broad deployment and then testing? Is it as the build out occurs that people need your product? If you could just give me a little color, how you fit in.

We have two product lines, one is the Voice-over-IP performer and the other one is the Omni-Q. Voice-over-IP performer is a lab solution that it is a high-end solution that is really required in two occasions. One is, when the traffic is high you want to simulate and to troubleshoot high volume Voice-over-IP. When you have low volume you can justify or test it also with software tools or other stuff. When you are coming to high-performance and high traffic, that is the time where our lab products will come into place.

The other part is the Omni-Q. Omni-Q is the monitoring solution for a call quality in Voice-over-IP networks. When you have implemented Voice-over-IP, you start getting some traffic. The cost effectiveness of just increasing the bandwidth is enough in order to resolve quality issues. In two occasions you will go faster into Omni-Q solution. In one case, when traffic is increased in a way that the cost effectiveness of our solution will come into place, and the second thing and we see that two, is when the large carriers are getting into real business.

At that point they need to, for their customer, to make sure to commit to level of service. At this point, even though the traffic is lower, they will need some tools to measure and to help them in providing this level of service to their customers. Again, we see the monitor in two areas. Either high volume where the problem starts to exist also with the smaller service providers, and with the large service providers, as soon as they promise a level of service to their customers then they have to make sure they can provide it.

So the need for your products then comes a little bit later in this cycle after a lot of the buildout has happened and service starts to be launched as opposed to upfront in building the network?

In the Voice-over-IP, alright.

Thank you.

Lenny Brecken from Brecken Capital.

Your receivables are bordering on 90 days outstanding. Where do you think you are going to go with in the next couple of quarters?

Usually we have almost very close to 90 days because we are shipping, mostly we are shipping -- our sales, our revenue, depends when we ship the revenue in the quarter. When we ship the revenue in the next, in the second part of the quarter, usually we are giving about between 30 to 45 days credit. We see almost 90 days, but in general we don't have big history of (indiscernible).

Can you describe any new products that may come this year, and just to give us an update on the competitive landscape, that would help.

In the Voice-over-IP, our main target this year will be in two areas. The first area will be concerning services. We believe the second phase of the Voice-over-IP development will be into services, where the money is coming from, especially when you talk about video and other services that has come over the Voice-over-IP networks. In general, a Voice-over-IP is also becoming an enabling technology and we do see the integration of the Voice-over-IP with cellular and with the other technologies and we see that trend also something that we are developing towards.

Concerning the cellular, in our product line we have a few layers of product. The first layer is the protocol analyzer, the ability to look at the specific line and to understand what is going on with that, what is going on in the line. In this area we are going to increase capacity, bring more interfaces and support better, different protocols. Then we come to what we call consultants and that is the ability to give our customers the ability to understand what (indiscernible), what is going on, but why it is going on and to alert problems.

In this level we already had consulted for specific interfaces. We are introducing right now what we call network consultant which is the ability to look at the whole network as a whole and do some troubleshooting on the network. We are going towards the direction of bringing more statistics, more database type of product, so you can take large installations of multiple units of Cellular Performer and create an engineering product that we are going to introduce into the market.

Okay. On the competitive landscape?

Arnon Toussia-Cohen Competitive landscape. In the Voice-over-IP there are quite a few competitors. Mainly we see Empirics (ph), SawNet (ph) and Agilent. These are the main competitors. I think that with the Voice-over-IP you see more and more focusing. I think we are going to be more dedicated and more focused with the voiceover IP and that will do more differentiating of our product in the market, but we do see more and more competitors coming into this market because it has become more spread out.

Concerning the Cellular Performer, we have really two major, three major competitors. One is Tectonics (ph), the other one is Agilent and the two of them are really leading the market right now, and there is NetHawk (ph). This is a Finnish company that is smaller than the two big ones. In this market the barriers are much higher. It's more competitive. The barrier to penetrate this market is higher because of the technology that is needed and we don't anticipate more competitors to go into this market.

We do see, because of the GEAR and because of our introduction of this expert system and the consultant different things we are bringing, we believe that currently we have advantage in the market and we do believe that again, looking just where we are right now that there is a window of opportunity of technical advantage in the markets in the next future.

By the way, just for this quarter, are you committing to year over year growth at all for this first quarter?

We are not committing to anything. We didn't announce any forecast for 2004.

Thank you.

At this time, there are no further questions. Please continue.

Arnon Toussia-Cohen Thank you very much everybody and we'll talk to you again next quarter. Thank you, bye.

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