Radcom Ltd (RDCM) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call please press star then zero. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Nolga Fisher (ph). Please go ahead.

Thank you, Linda, and good morning everyone. With me today are RADCOM's CEO, Arnon Toussia-Cohen, and its CFO David Zigdon. By now we assume you have seen the press release, which was issued before the opening of trade 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 effect of the company's accounting policies, and other risk factors detailed in the company's SEC filings. The Company does not undertake to update forward-looking statements.

Now I would like to turn the call over to Nonny (ph). Go ahead, please.

Thank you, Nolga and thank you all for joining us. As you can see from the earnings release, this fourth quarter was a strong end to a great year for RADCOM. We continued driving sales on the Cellular Performer and the Omni-Q and the success in our efforts to penetrate North America. Our sales grew steadily, reaching $60 million for the year, which is 43 percent higher than 2003 and 5.1 million of the revenues from the fourth quarter alone. As a result, we have returned to profitability, net of one-time expenses, after four years of losses.

Just as important, we have a strong backlog and rich pipelines of potential sales. We see continued strong growth in the year ahead. The secret of our success is that we are addressing the right markets with the right product at the right time. Two-thousand and four was the year of the converged network. After investment in voice over IP and 3G began again in 2003, during 2004 it began to increase, marked by large scale rollouts and mainstream deployment. The voice over IP market that we expected to develop in 2000 and 2001, finally began to build momentum and we began to see true 3G progress. As such, both of these areas are becoming a major focus for accessing solution companies.

We adopted a two-stage strategy. First, to avert the need of equipment vendor and then to leverage its success to the penetrating of service providers, a much larger market. This is what we did and it is working out as we had originally planned. Now we see the service providers as the key for our future growth. Our efforts to increase our service provider penetration includes both sales efforts and the development of product to address their future needs.

Throughout 2004, we saw growing interest in the Omni-Q voice over IP, quality management systems, in step with the deployment of large scale voice over IP networks and secured our first large of two Omni-Q sales, including a sale to British Telecom for their 21st Century project.

We also began seeing the worldwide ramp up of the 3G deployment, which should begin driving increased sales of our Cellular Performer. The Performer is a comprehensive cellular network analyzer that serves four different 2.5 and 3G service provider needs; troubleshooting, analysis, monitoring and data collection. As an only one product it has become essential tool for total engineering needs of the service provider, differentiating us from our competitors who must answer each different need with a different tool.

To date it has been chosen by 20 cellular operators, becoming the main driver for our growth over the last two years. It has built us a nice backlog, along with rich pipeline of sales and with more than 200 cellular operators turning toward 3G, we see plenty of room for more sales.

This last area I would like to discuss is the success of our sales organization. During the fourth quarter we were successful in turning around our sales in North America, one of our critical focus areas. Sales for the quarter from this region reached $1.7 million and a nice pipeline gives us visibility for continued growth. In addition, we are investing in the development of China in major new opportunity. We are following the same strategy which we used to benefit other markets. First, focusing on 3G vendors with the goal of penetrating service providers.

To prepare ourselves we have recently recruited a senior industry veteran from the local market to manage our Chinese operation.

Another aspect of our sales strategy is to form alliances with companies that provide management services and applications to the same operators that we target. The alliance we have formed earlier in the year with PTR has begun to pay off and we are working on others.

So, taking as the whole, 2004 was an excellent year and we believe 2005 will be even better. We're addressing the industry's fast and growing markets and our products are proving to be essential for top tier players. Our sales organization is executing well in all target regions now and our R&D staff is developing new product to maintain our technology leadership. All of this confirms the strategy we have been following and position us for accelerated growth in the year ahead.

I'd like to stop here and let David go through the financial results, then I'll come back to sum up and answer your questions. David?

Thank you, Nonny, and hello everyone. Since you have the financial statement in front of you, I'll review just the highlights. Revenues for the quarter were 5.1 million. As Nonny said, these are our highest sales in three years, up 26 percent compared to the fourth quarter of 2003. For the full year, revenues were 16 million, up 42 percent compared to 2003.

On a geographical basis, the division of our sales for the quarter were about 33 percent from North America compared to 19 percent in the third quarter of 2004; 51 of our sales came from Europe and 11 from Asia Pacific. For the total year, North America accounted for 28 percent of our sales, Europe accounted for 53 percent, Asia Pacific for 14 percent and the rest of the world, 5 percent.

Going forward, we expect to see growth in our target markets, with continued momentum in North America. The breakdown for the year by product was as follows. Performer sales were 11.1 million, compared to 7.1 million in 2003. Omni-Q sales were 2.4 million compared to 0.5 million in 2003. Prism sales were 2.3 million, compared to 3.3 million in 2003.

Gross margin for the quarter was 68.3, just over our target of 68 percent. In general, the gross margin changes according to the geographical needs in the exact product flow. But we believe it will stay around 68 percent on average.

G&A expenses for the quarter include a one-time charge of $520,000. This was a federal patent claim filed by Acterna. Although we did not acknowledge any infringement of the patent on our part, we settled the case in order to save time and litigation costs. Net of this charge, our operating expenses remain steady. However, now that our opportunities are raising, we may need to increase our operating expenses slightly in the areas of sales and marketing and R&D.

Net loss for the quarter was $243,000, or 2 cents per share, compared to a net loss of 351,000, or 3 cents per share for the fourth quarter of 2003. Excluding the one-time charge, net profit on a non-GAAP basis was 277,000 for the fourth quarter. This is our first quarter net profit since the third quarter of 2000. For the full year, net loss was 1.7 million, or 12 cents per share, compared to 6.2 million, or 59 cents per share for 2003.

Turning to the balance sheet. Cash and marketable securities were approximately 8.6 million at the end of the year, down by about $400,000 for the end of the third quarter. Finishing goods inventory is up due to the (indiscernible) cost of sales related to unrecognized revenue.

Going forward, we have a book to bill ratio greater than 1. With a full pipeline of sales opportunities we can give you guidance. However, please remember that actual results may differ materially. We expect revenue for the first quarter of 2005 to decline slightly compared to the fourth quarter of 2004, due to our normal seasonality. However, we project year over year increase for all four quarters of 2005. Although we continue to keep careful watch on expenses, we will probably see moderate trade in sales and marketing and R&D. With higher revenue, steady growth margin operating expenses, we expect to post operating and net profits in each quarter of 2005.

Back to you Nonny.

Thank you, David. So that's it for the quarter, in summary. Two-thousand and four was a major transitional year for RADCOM. With the right product at the right time we have moved from losses to profitability and driving demand in all target markets. We are succeeding in our efforts to penetrate top tier customers and have turned around our sales in North America. These will be the key drivers for our future performance.

Our focus areas, 3G, cellular and voice over IP, are among the industry's fasted growing segments, with the power to drive continued improved sales for RADCOM. We continue to invest in the future, both in terms of R&D and sales and believe in the potential of the service provider market to drive significant growth for the Company.

Thank you for your continued support and for participating in this conference call. With that we'd be happy to take your questions. Linda?

(OPERATOR INSTRUCTIONS.) Lenny Brecken, Brecken Capital.

Hi, guys. Congratulations on a good quarter. I just wanted to ask, I mean, in terms of your sense of the size of voice over IP deployments, can you just give us the big macro picture of what's happening now and what will happen throughout the year?

I will not go into details of the numbers, because that's very difficult, especially we are focusing on the test of recent (ph) markets. There are two different markets, one is the Enterprise, which we are not active in, and this is growing quite nicely. But this is already in the last two years.

The change that we have seen in the last, I would say, half a year, and we see the future even higher than that, is the Operator side. It starts with the cable companies that are very active in providing a voice solution. And moving now into the different silicon (indiscernible) and the TCPs in the rest of the world. And the example that we gave during this conference and with the announcements we made was that at 21st Century British Telecom they are providing -- they are planning on replacing the whole network with voice over IP. And we see the same progress is happening with the other operators. And we believe that this is really where the opportunity is for us. The ILECs, I'm sorry, I said Felec. The ILECs. On one hand the PTTs. On the other hand, even shorter-term is the cable operators. And we believe this is the market where we can shine and we can make our solution best value for the customers.

Where are we in terms of the deployment for that particular segment? I mean, how is the market going to play out this year? There's been a significant increase in the last six-months as you said, but I'm just looking forward into the next six to 12-months. You know, just size up the market for us.

Of course I'll not talk in specific about numbers, but the behavior of this market is a little bit different from what we see from the (indiscernible). What we see is a penetration in a way of the smaller investment at the beginning. And we do see more companies that we sell systems that continue to provide us ongoing and repeat business. I'll give you an example that we see in Korea, where they move faster with the voice over IP. And we see that a few companies in Poland bought our solution and continue to invest in the same solution. What we see with the others is that service provider we did succeed in penetrating, we have repeat business. And that's why we're optimistic, not just because of the continued new operators that are going into the voice over IP, but more from the same service provider -- not more, but you see also service provider that started with voice over IP now moving and implementing wider and wider in the network.

Okay. So essentially now your sales to either the Telco or to the cable companies are for the most part then small, early deployment type orders?

I wouldn't say small, early type. I would say that the behavior of the voice over IP usually is done by islands (ph). They are not implementing everything at once, but they are implementing it in some areas and then growing the voice over IP into other areas of the company. And that's the way that they are implementing voice over IP. That's the difference that we see.

Robert Trustman (ph), Bentley.

Thank you. Can you put a little bit more color on what the pipeline looks like now, versus possibly one year ago? And also, is there any sort of guidance you could provide for revenue growth for 2005 versus 2004?

The pipeline versus the previous year, it was significant -- it grew significant and actually we see it from a different day and not only from the vendor segment, but also from cellular provider, carriers, in the voice over IP and in the cellular market. Regarding the full year, at this point in time we are not feel comfortable to give the guidance for the full year. But as we said, we're seeing that quarter over quarter in the full year we will grow in 2005.

Okay. The charge for $520,000, what line is that in in the fourth quarter report? Is it part of --?

G&A.

It's in the G&A, okay. So if we back that out, you would have had, as you say, an operating profit this quarter.

Correct.

And will there be leverage as your sales grow in 2005, I know gross margins may stay about where they are, but will you be able to leverage the G&A and sales and marketing, or such that operating margin should improve from here?

Yes, of course. We would like to, as I said, we'd like to maintain the same level expenses, but although we are impactive (ph), when we see the opportunities then we have to invest. Like we need some more forces in the R&D and the sales and marketing, more workforce.

I will add to that that if you look at our numbers you should estimate that a lot -- as soon as we reach the breakeven point, most of the revenues that we get are going into the bottom line. And that you can see from the level of the expenses. The slight increase in R&D and sales will not influence on that, that most of our sale revenues. It's because of that the margins that we have will go into the bottom line.

Okay. Can I ask you then, to follow up on that, looking out at an annual model over a period of the next year or two, what kind of operating income margins can the company get to if the sales grow as you hope?

As Nonny said, we think each dollar in the top line can contribute about 50 cents in the bottom line. So long-term target more that we see operating expenses about 50 percent operating expenses and the gross margin, as we said, 68 percent.

Okay. So as your sales grow, approximately 50 percent of incremental sales could drop to operating profit? Is that right?

Yes, it is.

(OPERATOR INSTRUCTIONS.) There are no further questions at this time. Please continue.

Okay, thank you, everybody and see you next quarter. Thank you for support. Bye.

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