Radcom Ltd (RDCM) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the RADCOM third-quarter earnings conference call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session with the instructions being given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded and I would now like to turn the conference over to our host, Ms. Noga Fischer (ph).

Thank you, Laurie and thank you all for joining us. With me today are RADCOM's CEO, Arnon Toussia-Cohen and 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 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 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. Go ahead.

Thank you, Noga and thank you all for joining us. We are pleased to report another great quarter. Sales were $5.09 million, up 44% on a year-over-year basis. This is the third straight quarter that we have grown by more than 40% year-over-year and the eighth quarter of double-digit growth. It is also our third straight profitable quarter. So as you can see, during the past year, we have stepped up the pace of our development, our building momentum. With a strong pipeline, we see continued sequential growth and profitability ahead. During the next few minutes I will give you more detail about the quarter and discuss the market trends that are driving our growth. Then I'll turn call over to David Zigdon, our CFO, to go over the financial results and open the line for your questions.

Our main sales targets continue to be the world's major service providers who need our product to achieve consistently high-quality of their complex 3G voiceover IP and triple play services and to help make them profitable. These operators have large national original networks and use our products for their ongoing monitoring needs. We are pleased with our success in this effort with service provider accounting for over 80% of our business in Q3.

Our strongest service provider sales were to 3G cellular operators. We are benefiting from high-level of CapEx investment in this market. One of the key challenges faced by 3G operators is maintaining the high service quality they need to assure customer satisfaction and revenue. Our solutions meet their service monitoring and analysis needs as illustrated by sales we have closed with some of the industry's largest operators.

For example, in August, we announced a multimillion dollar deal with a major U.S. wireless network operator for a CDMA 2000 cellular network monitoring solution. Like so many operators, they found it very difficult to collect and analyze traffic and media and to consolidate the information over the network. They invited us to carry out the field trial for our monitoring solution. Then they ordered a trial system in the fourth quarter of 2004. After using the system for two quarters, they moved to a national deployment valued at several million dollars.

Each system includes monitoring probes as well as our cellular expert service management and consultant packages over a period of several quarters. To provide a complete solution according to their specifications, we integrated a third party product from one of our partners. This shows the value of partnerships as well as the advantage of the open architectural solution. This goes well with our strategy of taking advantage of our capability for benefits of the customer.

Our success with top tier service providers together with our records with Hutchinson and others positions us as a player in this market helping us build a strong sales pipeline and win new customers. In parallel, we continue to prepare for the 3G opportunity in China through cooperation with manufacturers and early stage marketing. The voiceover IP, Omni-Q, is our product for operators ramping up their voiceover IP and triple play deployment, including cable companies, ILECs and some cellular providers.

As expected, interest in Omni-Q is growing in step with the uptick of the voiceover IP with particularly strong interest so far in Western Europe. We closed a number of sales during the quarter and are currently in the final stages of several additional sales. Taken as a whole, sales of all type of service providers accounted for about 80% of our revenues in the third quarter with the remaining share of our sales made to development laboratories with equipment vendors. Although the equipment vendor market isn't as large as the service provider market, it is important to our strategy.

By staying close with these labs we maintain our standing as technology leaders making it easier to penetrate the larger markets. In parallel, we continue to engage in aggressive product development to extend our market leadership. Our technology vision from the beginning was that it would be eventually one converged network with different access methods. Therefore, we designed our products around the single architecture that would be ready for convergence. Now, convergence is rolling out at a rapid rate and a number of our cellular customers are beginning to ask voiceover IP solutions, which will become necessary when released five of the UMTS platform and (indiscernible) eight of CDMA come onto the market.

As such, we decided to begin marketing the single platform as a differentiating feature. We recently branded a unified platform product that addresses both wireline and wireless needs under the name of the Omni-Q. This gives us a strong competitive advantage enabling us to address the needs of cellular operators offering voiceover IP and triple play services over the networks. For the future, it will also serve wireline operators launching IMF-based services.

Taken as a whole, we are satisfied with the progress. Our progress shows that our strategy is working and we're optimistic looking forward. I would like to stop here at let David go through the financial results. Then I will come back to sum up and answer your questions.

Thank you, Arnon and hello, everyone. Since you have the financial statements in front of you, I will review just the highlights. Revenue for the quarter were up 5.9 million, up 42 year-over-year as compared to the third quarter of 2004. This is the third quarter in a row of about 40% growth. On a geographical basis, we are very pleased with developments in North America, which accounted for about 49% of our sales. A significant portion of this was from the large sale to the CDMA 2000 operators. 43% of our sales were from Europe and about 5% from Asia-Pacific.

Gross margins for the quarter was 66%, down slightly from 67.5% in the second quarter. This reflects the fact that we integrated a third party product into the solution that we sold to the CDMA operators. Operating expenses were up reflecting a moderate increase in our sales, marketing and R&D expenses. However, as a percentage, the increase was much lower than the growth of our revenues. This shows the value of our focus on the bottom line as well as success of our effort to balance long-term and short-term needs.

With higher sales and moderate expenses, we delivered our third straight profitable quarter with net income of 492,000 or $0.03 per share. This is a net margin of 8.3%. In Q2, net income was $0.01 per share and we lost $0.01 per share in Q3 last year.

Turning to the balance sheet, cash and marketable securities were just over 10 million at the end of the quarter, up from 9.5 million at the end of Q2 and 8.5 million at the end of 2004. Current long-term deferred revenues as of the end of the quarter were 2.5 million compared to 2.1 million at the end of Q2 and 1.5 million at the end of 2004. The increase was mostly due to the increase in the number of port (ph) sell customer support warranties beyond the initial period. As you can see, we are moving in the right direction.

As to guidance, we continue to have strong pipeline of sales giving us visibility for Q4. We expect revenues for next quarter to range between 6.3 and 6.8 million. As always, you should keep in mind that our results from any one quarter will continue to fluctuate based on the exact timing of individual large deals. Back to you, Arnon.

Thank you, David. So that is it for the quarter. In summary, the pace of our growth has increased steadily during the past few quarters showing the value of our products and our strategy. The national deployment that we have achieved, together with growth of 3G and voiceover IP, are paving the way for continued future success. While our top line is growing, we have been able to minimize the growth in expenses resulting in steady increases in profitability.

For the future, we will continue to enhance our unified platform to address the triple play opportunity and have established a new focus on the emerging IMF space. Overall, we are proud of our performance and optimistic as we look ahead. With that, we would be happy to take any questions. Operator?

(OPERATOR INSTRUCTIONS). Steve Radnitski (ph), USIP.

First off, it looks like you guys are working very hard and we appreciate that tremendously. Could you remind me what your NOL position is and I guess we still should -- and your tax rate potentially going forward?

At this point in time, we cannot see any tax issue for the next three years as we carry forward a lot of (indiscernible) and the benefit that we have from the Israel government -- the tax will be very minimized.

The NOL is how big currently?

I'm sorry, what is NOL?

Your net operating loss carryforward or your losses -- the losses -- I apologize. I just didn't spot it there. What is our current loss position for tax purposes? Our carryforward losses, if you have it?

I don't have it in front of me but we mentioned it in the 20-F but I can email you this number if you want.

Okay. That's fine. And then secondly, in this upcoming quarter, you have this large U.S. customer, which I guess was responsible for a good deal of the sales in the third quarter. Will we see incremental sales to that customer in the fourth quarter?

No. We will see sales to this customer but not as significant as it was in the third quarter. We believe it will -- they are taking it right now, implementing it in their organization and then it will come like a few ways within the next few quarters. In this quarter, we did some others but not as significant as in the third quarter.

So in a sense, we're seeing more broad-based demand for your product because we are not relying on this one particular customer for the majority or for a good deal of our sales going forward given that you are projecting higher revenues in the next quarter?

Sure. And even during this quarter it was significant but it was not the only large account that we won during this quarter.

Are we seeing follow-on orders by this customer or are we still working off of the same order?

No, it is a following on. I would say we are working both on the initial deployment that this customer has and prior to that, we extended even each system that already is installing. They are extending it to more capabilities and more features.

Okay. So right now your reviews from this customer are very good? I mean it seems like they like the product and they are continuing to order more. Is that correct?

That is correct.

And finally and then I'll let it jump to someone else. I want to understand -- we keep hearing announcements from Google, Yahoo! and a lot of web-based services and then you have got the Skypes of the world. As all these companies are rolling out voiceover IP, are we going to see some of that business from any of these providers? Voiceover IP is picking up at -- it seems to be the growth rate is even greater than the 40%. What sort of business should we be seeing, if any, from some of these larger people like Yahoo! and Google?

I would differentiate between these people and the wireline. Most of these people are using other people's networks in order to connect. They are buying minutes from people who are implementing the infrastructure. Now the way that -- if you compare the cellular to the voiceover IP, the cellular -- when an operator is implementing cellular you have to implement it across the board. And that is why you will see is a very large original initial order.

On the voiceover IP -- it works a little bit differently. They are growing -- it is implemented like island? Which means let's take large service provider, British Telecom, that we announced for instance and what they have done is they are implementing it for a few customers and then they are expanding it into more and more customers. So they don't need -- they are not doing this across the network at one time but more gradually as time continues.

So the way -- the behavior of the orders in the voice over IP, we see them as relatively smaller orders at the beginning but then we see more repeat sales as network is growing. And that is the way that we are feeling right now. We closed -- we got, for instance, an announcement from one of the big service providers of the world that decided to work with us on voiceover IP but it is not a big order at the beginning but it will continue. We believe that it will continue as an ongoing basis to provide us more and more business along the time.

So it is a little different behavior and that is why we see more cellular right now on the numbers but not necessarily the same thing from the number of customers and the value of the customer on the growth in these two different markets.

I understand. And I have seen that in the cable providers. That they will test market these voiceover IP in a limited market area --.

Exactly.

And then they roll it out. As they roll it out, we should see more of that business. Have we got any sales, so far, to any of the large whether it be cable or I guess DSL customers here in the U.S. or in Europe for that matter?

We did get some of them but again these are -- the initial numbers are not very large. Although they are very significant customers and we believe that they will be the second wave of growth of RADCOM within even 2006.

Perfect. I'll let it switch to someone else and I'll get back in queue if I have another question. Thanks so much.

Jeffrey Meyers (ph), Intrepid Capital.

Congratulations on this quarter. Maybe you could talk a little bit about your distribution strategy. Obviously you guys are smaller than a lot of your competitors. How are you going to market in the various geographies and I guess especially in Asia-Pacific, how are you targeting that region?

Well first of all, there is a different strategy in different areas. In the U.S., most of the big deals were closed direct. We have the President that we brought along about a year ago and he is very strong in closing deals direct and he was very helpful in the progress that we have in the US.

In other places, the way that we compete with the big guys is that they are selling direct. We cannot compete with them going direct. So the way we are working is we have a very good and very wide distribution channel that is based on distributors all over the world. Now many of them are capable of selling this system. Not all of them but many of them. Especially in Europe, we see that they are capable of doing that and we are supporting them and the additional expenses that we are putting into the sales and marketing is in order to support them closer, including during the trials and even with closing the business with their customers.

In the Far East, as you see, the numbers are not high enough. We believe that this is an opportunity for us in China. We recruited a general manager for our office there that we believe has the experience and the relation to expand it especially for 2006 where we see that our targets are -- that we believe the growth will come in 2006.

And in the far -- in the other areas, we are looking and talking with our card (ph) distributors, who is fitting (ph) the needs of closing deals when you talk about systems and we even replaced the regional manager because we felt that we need someone with more experience of closing deals on a system level. And we believe that, although the numbers are not as high as we would like them to be, there is a good opportunity in the Far East and we are building our market there to grow the number. So this is another opportunity for us to grow the number in the Far East.

Got you. In terms of 2006, do you guys have any visibility yet into what kind of growth you can drive revenue growth in 2006?

We have initial but we are -- we will look into that. We are working on a 2006 workplan and we will give some at the end of the year, some guidance as we did for 2005. But basically we believe that the growth that we see is -- We have a pipeline that is substantial. But at this point, we don't want really to give any numbers. We prefer to be conservative at this point and make sure that we are proceeding through next quarter, which, as usual, a very important quarter but we continue to believe that we will do better than the market. This is one thing that I am very confident is that we will continue, as we said, during this year. So the statement that we gave in 2005 for profitability and the ability to grow more than the market, this is something that we're sure we will be able to or we believe right now, we will be able to sustain.

Nadu Pedali (ph), Fertilemind Capital.

I've got two questions. First, Omni-Q product, is that the one targeted towards (indiscernible) IP providers primarily or do you sell other products as well? The second question is a follow-up from an earlier question. When the cable providers, (indiscernible) providers roll out their services in stages, they start with pilot in a small area and then expand into other areas. How are your products being used? Are they used in a stationary mode where they buy the equipment and the equipment has to be there through the life of the service in that particular area or can they use the same product when they roll out new services in new areas? Thank you.

I'll answer first the second question. Our product is capable of doing both monitoring and troubleshooting and we have two different platforms. One is rack mounted and the other one is portable. So the product can be used really in three modes. The first mode is you have the network, you want to monitor it on a regular basis to get reports and then you will do it on -- what you will do is you will install it and have the reports from the management in the central location.

The second way is to have a totally portable, which means the technician will come with a unit. We connect it. We look into the information and collect it.

And the third option is to use a combination, which means you're using a rack mount to install it but then you have a new area or problematic areas. You can bring more equipment. Connect it. Integrate it as part of the system and then take it to another place during installation of other areas. So there is a variety of methods of using our products according to the customer needs.

Concerning the Omni-Q as a product, Omni-Q is the management both for voiceover IP and for cellular, which means that if you are looking for only an analysis analyzer, you can take what you call the performer, which is the probe or the analyzer and you can take and use it. If you want a central management, including the database, the ability to do the reporting, etc., you could Omni-Q.

Now before the integration, we had two different marketing products. One is called the Omni-Q the other one was called the Expert. Omni-Q for voiceover IP; Expert for cellular. As we see the integration of the voice cellular and voiceover IP, we integrated into single product we call the Omni-Q, which will support all the different technology, both cellular and voiceover IP.

Could you give us some light on what amount of -- you said 5% of sales is from Asia-Pacific, right, for this quarter?

Right.

Do you anticipate that to continue to grow further compared to U.S. and Europe?

For sure. We expect it to do better and we believe that the potential of the market and our distribution there can do much more than that.

(OPERATOR INSTRUCTIONS) We have no additional questions at this time. Please continue.

Thank you very much for your support and we will speak to you again next quarter. Thank you.

Ladies and gentlemen, this conference call will be made available for replay starting today, October 31st at 10:30 AM Eastern time in the United States. The replay of this conference will run until the date of November 7th at midnight Eastern time in the United States. You may access the AT&T teleconference replay system within the United States by dialing 1-800-475-6701. Please enter the access code 798472. International participants may dial country code 1 and then 320-365-3844. Again, that number, country code 1, 320-365-3844 and the access code is 798472. That does conclude our conference call for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.