Radcom Ltd (RDCM) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to today's RADCOM second-quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host today, Ms. Noga Fischer (ph) from Fischer-Cohn (ph). Please go ahead, ma'am.

Thank you, David, and good morning, everyone. With me today are RADCOM's CEO, Arnon Toussia-Cohen, and its CFO, David Zigdon. By now, we assume you've 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'd like to turn the call over to Arnon.

Thank you all for joining us. The second quarter was another period of strong year-over-year revenue growth with high gross margins, operating and net profits. Revenues were $4.8 million, up 46% compared to the second quarter last year. This is within the guidance we gave last quarter. We continue to grow faster than our market and to be profitable each quarter.

In terms of sales and marketing activity, the quarter was a period of progress, giving us a strong pipeline of sales across all product lines and increased visibility for additional growth. During the next few minutes, I will take you through the market trends most relevant to our business and the progress we've made over the last few months. Then, I will turn the call over to David Zigdon, our CFO, to go over the financial results and open the line for your questions.

In general, we are benefiting from the momentum of the 3G, which is increasing demand for our Cellular Performer and the continuing migration towards triple-play services, which is increasing demand for the Omni-Q. I will speak about each of these in turn, beginning with the 3G.

A growing number of mobile operators have established initial 3G deployment using UMTS or CDMA 2000 platforms. The challenge now is to build revenues and to try to get return on their investment. This means launching services that offer value for money with quality that is good enough to satisfy their customers. As a result, our Performer sales are strong. Demand has been particularly good for our CDMA solutions, where we have the strongest track record, and we also have good UMTS opportunities in the pipeline.

Besides a steady flow of (indiscernible), we are closing large opportunities for additional deployments. For example, several months, ago we closed a deal for -- in an initial Performer installation with a U.S. service provider. Now, after they have seen what a difference our solution makes in their ability to manage their risk quality, they are ready to expand the installation significantly. This proves the sales strategy of aiming for initial penetration of top-tier service providers and then building them into large-scale, long-term business with the potential to drive our revenues to the next level. We are particularly pleased with the efforts of our North American sales force in this area, under the direction of the President of our U.S. subsidiary.

Our strength in CDMA mix is particularly qualified (indiscernible) the growing 3G opportunity in China. We've already developed our solution for the TBS/CDMA, the 3G technology that will be deployed in China, and have established corporations with several local equipment manufacturers. We've already begun selling nice quantities of test equipment to vendors and continue with sales and marketing activities targeting service providers. We believe the service provider activity will begin in earnest towards the end of 2005 and expect it to become a new revenue driver for Radcom.

The other driver of our sales is the increasing deployment of Voice-over-IP services by incumbent operators and the difficulty of guaranteeing a consistent, high-quality customer experience. Omni-Q is the comprehensive approach for that problem. It is unique in its ability to provide active and passive monitoring end-to-end in a triple-play environment. Its target markets are all the triple-play service providers, including cable companies, ILEC and now even the cellular providers.

During the second quarter, Omni-Q sales were the best ever and we see additional strong demand in the marketplace.

On the development side, we see opportunity in new products to support cellular providers as they begin to offer triple-play services over their cellular networks. With our advantage in testing and monitoring Voice-over-IP and Video-over-IP, our direction is to give the cellular providers a comprehensive solution for managing the quality of these network -- of next-generation services. This will become a necessity when at least five of the UMTS platforms and released eight of CDMA (ph) come onto the market.

At the same time, we're also developing the Omni-Q to support cross-network monitoring for clients running a combination of circuit-switch and packet-switched voice services by increasing our support for the SS7 networks. All of these investments are aimed at maintaining our leadership in fast-changing markets.

Taken as a whole, we are satisfied with our progress on (indiscernible) looking forward.

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

Hello, everyone.

Since you have the financial statements in front of you, I will review just the highlights. Revenues for the quarter were 4.8 million, up 46% year-over-year compared to the second quarter of 2004. This is at the low end of our guidance we gave last quarter and reflects the timing of large deals in the pipeline.

On the geographical basis, the division of our sales for the quarter were about 40% for North America, which is steady with the first quarter. At (indiscernible) stage, we are very pleased with the development in this important region. 39% of our sales were from Europe and 15% from Asia-Pacific. By product, Performer sales were about 3.7 million. In terms of Omni-Q, we are about 1 million.

Gross margin for the quarter was 67.5, about the same as it was in the first quarter of 2005. We believe it will stay around 68% on average.

Operating expenses were up about 10% on a year-over-year basis, reflecting a moderate increase in our sales and marketing and R&D. We continue watching expenses closely, and we continue to have resources as required by the growth of our business.

With higher sales and moderate expenses, we delivered another profitable quarter, as promised. With net income of 103,000 or $0.01 per share, this compares to a net loss of 675,000 or $0.05 per share in the second quarter of 2004.

Turning to the balance sheet, cash and marketable securities were approximately 9.5 million at the end of the quarter, up from 8.5 million from the end of the fourth quarter of 2004. The increase in long and short-term disparate (ph) revenues was mostly due to an increase in the number of wholesale customer support warranties behind the initial (inaudible) period.

As to guidance, we have a strong pipeline of sales and it has improved our visibility for the next few quarters. For the third quarter, we expect revenues to range between 5.3 to 5.8 million. At these levels, year-over-year revenue growth will be between 30 to 40%. For the full year, we expect another two profitable quarters. Our results for any one quarter will continue to fluctuate based on the exact timing of individual large orders.

Back to you, Arnon.

Thank you, David.

That's it for the quarter. In summary, as promised, we continue to grow faster than the market and to be profitable each quarter. We are beginning to achieve national deployments in major markets. We are investing in cutting-edge products for evolving triple-play markets. Overall, we feel well positioned to take advantage of growing markets.

With that, we'd be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Kenneth Liner (ph) with Alton (ph) Capital.

Good morning. It looks like you're starting to make inroads in your markets. I was wondering where you stand with the competition and how do you estimate the size of the markets that you're involved in?

The markets, as much as we know, are growing from around the size of $70 million, but the growth there, as we see and from the market research we have, is in the range of 25 to 30% growth year-over-year.

Our competition is a few companies depending on the area that we are talking. If you're talking about cellular, we have three major competitors, which are NetTest, Agilent -- maybe Agilent first -- then Tektronix and NetTest. Of course, on the Voice-over-IP, there are different competitors. I would say that mostly it's Agilent together with Bricks (ph) and a few other smaller companies.

Concerning the Omni-Q, we feel that we have the unique solution, as we are invested quite a lot in this product, and we believe that the uniqueness that we have on the ability to do both intrusive and nonintrusive testing of quality in the network and also the ability to do circuit-switch and packet-switching together and supporting video, voice and data on the same platform is a unique offering in the market.

In the cellular, our ability to do a few venues in parallel (ph), which is troubleshooting, performance analysis and also fault management and some kind of premediation for other applications gives us an advantage. Of course, we see competition are coming strongly, especially we see them in the cellular area. We don't see them as strong as in the Voice-over-IP, but in the cellular, we see a lot of investment for (indiscernible), both INET. For that reason, we see Agilent announced a few of their investments in this area and we see them in the market. We have to continue to invest both in the technology, as we believe that our advantage is the technologies and our abilities and on the other hand in the marketing in order to get to the customers and show them our values.

In 3G, we see progress of our competitors, but we do feel that we have our values and the direction that we take on introducing also the Voice-over-IP in this area will give us a long-term advantage.

If you don't mind, I wanted to ask one other question. In terms of your geographic spread, in terms of the Q1 customers, are you in a position to get involved with most of the customers? Because obviously, you wouldn't have the network that Tektronix or an Agilent would have.

It's a good question. The way that we look that we said, look, we have the disadvantage; we are competing with vigor. We don't have the resources to have direct sales in all the different markets. The way we structure it is working with partners, and we're working with good distributor partners in many, many countries. The advantage of that is that we can approach relatively fast to different markets and work closely with the customers.

The price for that is that we are leaving on the table a certain amount of money that we are paying on success with these dealers. But we still see and I think that that's the advantage of our approach, that still we can maintain the 68% gross margin.

So on one hand, we're working with partners that don't cost us anything unless we have a success. On the other hand, when we have a success, we still have the 68% gross margin, which means that we can compete in these markets. So I believe that this is a unique approach that provides us the ability to compete with the big guys. I agree that this is a challenge but I think that we show that we are standing to this challenge.

One other question, out of curiosity -- why isn't there any competition -- that much competition in the Voice-over-IP? Is it that the market is too small for these companies to commit resources, or is it that your product -- you know, you're the first to market? What is it?

I think that it's -- I think that you remember Radcom from a few years ago. We invested in the Voice-over-IP, relatively in early stages. We aimed the time towards the CLECs, and with the crisis of the -- at the time, we never gave up. We slowed down dramatically the investment in the product, but our vision was that it will become a necessity. We maintain our ability to sell this product. Many of our competitors at the time had to close doors or shut down this product because it was not -- it didn't bring them a faster return on investment. We believed, at the time, that our vision of convergence, both the cellular/data/voice/video, is where the future is going, and that's why we maintained, even during the bad times, we maintained the investment and the product.

So I believe we have currently an advantage. We announced, for instance, a success that we have with British Telecom that are going with their 21st Century; they're using our product in order to test their networks and their evaluation of where their future architecture will go. All of them are using our product and we have other success. I'm sure that competition will come, but I still believe that we have still a unique product because of that long-term investment that really started five years, four or five years ago. The competition will come and we will have to continue to invest in order to maintain our leadership.

Which market, which one has the biggest potential, the Voice-over-IP or the mobile market?

I believe that it's -- it's a funny question because I believe that it's the same thing. Our vision, or my vision is that there will be a single network that will provide Voice-over-IP, video data, the triple play and (indiscernible) other applications. The question of the access almost is irrelevant. It could be cellular 3G; it could be ILECs (ph); it could be ADSL, any other technology but the network will be similar. That's why we can offer a similar product to cable companies, to ILECs, to cellular companies. Of course, there's specific protocols, specific interfaces that have to be adapted from one to the other, but on the long-term, it will be a single platform that is doing that and our architecture is allowing them to do.

I just wanted to say this -- since a year or two ago, you've made -- obviously your investments are starting to pay off. You know, the growth you're expecting for the next quarter is quite excellent. Obviously, you've turned the corner. Do you feel you're at the beginning of your cycle here?

We believe that we are in the middle of the cycle. It's not really the beginning -- (multiple speakers).

Right, I'm sorry.

We are in the middle of that. We see the growth started; we saw the growth started from the beginning of 2003. From the beginning of 2003, we see quarter-over-quarter growth, dramatic growth coming back to profitability, so we are talking about the track record of more than two years.

Okay, thank you very much.

Ken Farsalis (ph) with Obreis (ph) Asset Management.

Gentlemen, good afternoon. Just a quick question -- looking at the press release, you comment on the fact that you're working on a number of large multi-quarter deals with top-tier service providers -- that the guidance that you give for the third quarter at 5.3 to 5.8, what kind of assumption is embedded in that guidance with respect to these large multi-quarter deals? Have you seen any of those come to contract? Have they proposed or -- (multiple speakers).

I would say yes; we announced some of them. In this conference I also discussed others, and we already see -- and I said that we already are seeing some of these projects come into place, including multiple orders and national deployment.

But there are still some others that are outstanding that have not yet closed?

For sure. I mean, we believe -- look, the market we currently -- there are about 16 service providers in the cellular that already implemented 3G and not all of them implemented monitoring and test solutions. We believe that the market potential is between 2 to 300 service providers just in the cellular. So there is certainly a growing direction there.

Now, look at all the ILECs that are moving from the digital circuit switch into the Voice-over-IP and the triple play. All of them are potential. So we believe the market is growing and as a company like us, the rate is in such a way it allows us to take advantage of this growth.

Then finally, one last question -- in both 2003 and 2004, you experienced sequential growth between the third and fourth quarters, from September to December. The way that your visibility is shaking out at this point, would you consider, would you believe that 2005 will be similar in terms of how the pattern shakes out between – (multiple speakers)?

I wouldn't go directly into the numbers, but the direction is right.

Great, thank you very much. I appreciate it.

(OPERATOR INSTRUCTIONS). Speakers, at this point, we have no one else queuing up for questions, so please continue.

Thank you very much and talk to you again next quarter. Thank you, bye.

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