Radcom Ltd (RDCM) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Radcom fourth quarter earnings release conference call.

[Operator Instructions]

I would now like to turn the conference over to your host, [Noga Fisher]. Please go ahead.

Thank you, Greg and good morning, everyone. With me today are Radcom's CEO, Arnon Toussia Cohen and the 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 this 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 [Noni]. Go ahead, please.

Thank you, Noga and thank you all for joining us. The fourth quarter was a strong end to a great year for RADCOM. For the quarter, our revenues were $6.6 million, up 30% compared to 2004. This was our ninth straight quarter of year-over-year double-digit growth and our fourth straight profitable quarter.

For the year, sales were up 39% to $22 million, our best results since 2001. These results reflect the fact that we are riding the wave of next-generation network deployment, and that the industry sees the value of our solutions. As a result, we have been growing faster than the industry as a whole, and believe we will continue with strong growth in the year ahead. During the next few minutes, I'd like to give you more details about our progress and to discuss the trends in our markets. 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.

It's fair to say that 2005 was the year that we succeeded in penetrating the service provider market. In the past, our products were targeted for laboratories. We used them for development and pre-deployment testing. Although our relationships with equipment vendors continue to be strategic, allowing us to participate in development of new technologies and to understand trends, now our primary customers are the next-generation service providers who need our products to maintain high-service quality.

We are pleased with the sales progress we made during 2005, proving the value of the investment we made to build our sales organization, especially in North America and in China. We closed several major deals with Tier-1 operators, including a million -- a multimillion-dollar national deployment for a US CDMA2000 operator, a UMTS solution for one of Hutchinson's subsidiaries in Australia, and a number of additional deals in Europe and in the US.

In November, we announced a sale to a Tier 2 GSM/GPRS and CDMA2000 operator in the US, proving the value of our products for small operators. In the Far East, we brought in an executive regional manager to begin addressing the significant opportunity in the region. In China, we built an infrastructure that enabled us to begin building the momentum of our sales and positioned us to take advantage of this significant opportunity.

Taking as a whole, we have sold our solution to over 30 cellular service providers with sales ranging in size from about $200,000 to several million dollars. Having established momentum in North America and China, in 2006 we'll increase our focus on Europe and the Far East, areas that offer a strong potential.

With analysts projecting the 3G market will eventually include 200 to 300 operators, and even larger number of next-generation wireline player, we believe there is a lot of room for additional growth. One of our differentiating features of our solution is its scalable, open-platform architecture, an advantage which makes it easy to integrate into other applications.

We have begun taking advantage of these features by pursuing partnerships with broad range of application providers looking to offer a total end-to-end solution to their customers. For example, we have formed a partnership with a provider of OSS systems and believe we have a strong value proposition to offer revenue assurance in RF optimization companies.

Recognizing the power of partnerships to extend our marketing reach and to contribute to our revenues, we have increased our focus on this area. In November, we recruited a veteran from the converged service industry to become our new VP of Business Development with a mandate to establish a range of technology and marketing partnerships for the Company. In parallel, we are benefiting from the increasing scale of voiceover IP deployment.

During the year, we closed several important sales for our Omni-Q voiceover IP service quality monitoring products to cable companies, as well as to wireline service providers. We continue to see a lot of interest in these markets. Recently, we were proud that Omni-Q won the Best of Show Award at the Internet Telephony Conference & Expo in Los Angeles. It was called a pioneering solution that is helping to drive the growth of the voiceover IP market.

On the technology side, we continue to develop all of our products to maintain our technology leaderships. During the fourth quarter, we became one of the first companies to launch an IMS simulation and testing suite. IMS is a new standard that is expected to simplify the delivery of services across cellular, voiceover IP and WiMAX networks. Our new product support equipment vendors with testing, stressing and various fine tools to help them develop their IMS based multimedia services. Meanwhile, we are working on IMS service management solutions.

Taking as a whole, we are proud of our progress. Our strategic -- our strategies prepared us to benefit from today's market trends, setting us up to grow faster than the industry. Our work ahead is to take full advantage of converged wave and emerging opportunities throughout the world.

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

Thank you, Noni and hello everyone. Since you have the financial statements in front of you, I'll review just the highlights. First, I will go over the results for the quarter and then for the year.

Revenues for the fourth quarter were 6.6 million, up 30% year-over-year as compared to the fourth quarter of 2004. As Noni said, this is our ninth straight quarter of double-digit growth year-over-year and our fourth quarter with a growth above 30%. On geographical basis, North America accounted for about 30% of our sales, Europe for about 40%, and Asia Pacific for 16%.

Gross margin for the quarter was 66.6%, up slightly compared to the third quarter. In general, the gross margin will vary depending on exact mix of sales. With our sales and moderate expenses, we posted our fourth straight profitable quarter with net income totaling 798,000 or $0.05 per diluted share. This compared to a loss of 243,000 or $0.02 per share in 2004.

For the year, sales were up 39% to 22.3 million, our best result since 2001. On a geographical basis, North America accounted for about 40%, reflecting the success of our sales effort in this important region. Europe was about 39% of our sales for the year. And Asia Pacific was about 15%. Net income for the year was $1.5 million or $0.10 per diluted share. This compared to a loss of $1.7 million or $0.12 per share in 2004.

Turning to the balance sheet, cash and marketable securities were $10.5 million at the end of December, up by $2 million since the end of 2004 with about $1.4 million of debt for operations. Current long-term deferred revenues as of the end of 2005 were $2.7 million compared with $2.5 million at the end of the third quarter and $1.5 million at the end of 2004. This was mostly due to the increase in the number of port sell customer support royalties beyond the initial period. As you can see, we are moving in the right direction.

As to guidance, the first quarter is generally weaker than the fourth quarter due to normalized seasonality in our industry. Nevertheless, with the current pipeline of sales, we can project that our revenues will remain similar to fourth quarter ranging from $6.3 million to $6.8 million.

As always, please keep in mind that our results from any one quarter will vary depending on exact timing of individual large deals.

One last note, in 2006 we'll began to expense at least stock option as required by financial accounting standard. At this point in time, we expect this to increase our expenses by about $0.5 million in 2006. We've run out at 30,000 in the third quarter.

Back to you, Noni.

Thank you, David. So that is for the quarter. In summary, we have been benefiting from the rise in 3G and voice-over-IP deployment and believe that they will continue driving demands for our product in the year ahead. Our investments in North America and China have paid off and we continue to build momentum in both of these regions. We view China as a particularly strong opportunity based on the success we achieved in 2005. For 2006, we will also focus on improving our sales in Europe and other parts of the Far East.

In addition to leverage the open platform advantage of our solution, we have begun pursuing partnerships with conversification providers; a step we believe will expand our marketing reach and revenue potential. Overall, we are proud of our performance and optimistic as we look ahead. Thank you for your support of RADCOM and for participating in this conference call.

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

[Operator Instructions]

Your first question comes from the line of Daniel Meron from RBC Capital Markets. Please go ahead.

Hi Arnon and David. Congrats for the fabulous results in the guidance. Can you mainly elaborate a bit more on the competitive landscape that you see out there? And how do you defer from competition? Also what's your comparative edge? Or how long it would take for your competitors to a close-up? Thanks.

The two main competitors we see today are Agilent and Tektronix. In the last year, we've seen Tektronix as stronger than before as they purchased INEX. And we see that as a major competitor today and we've seen many places and we see that as our main competitor today.

Our advantages are on -- I would say in three areas. First of all is the technology. We have and we developed -- we'll not go here into the details but we develop the base of our infrastructure is the gift which is unique, and infrastructure in the industry that allows us to provide high-performance and reliable results and predictable results.

The second thing I believe that ours is a small company and are reacting faster to new needs that are coming into the market, and we believe that certain interfaces, certain applications that run today are needed by our customers, we have advantage in this area.

The third thing is our distribution channels. And we have a unique distribution channel different from others. The others having a direct approach to the customer, but that means that the same guy, who sells [scopes] is also selling monitoring systems, which means that they need to have people around the globe in order to support a customer. We have distributors that are -- although it's not direct, which is a limitation -- we have -- they are very professional in the way that they serve the customer and they understand the technology and they stick very close to the customers.

I would say that additional to that concerning the platform, today we -- I think that we are unique in our ability to have a single platform that can do both voiceover IP and both in cellular, which is something that the integration will come -- first, it will come during next year -- and our ability to do both troubleshooting and by being open to others.

I must say that our limitation and challenge is the fact that both of these competitors are entrenched with customers, and this is really a chance for us. And I would say that in most of the cases, where we lost in the -- and we do lose, we lose from time to time -- this was the case.

The case was that the customer was entrenched with previous technologies. They had the relation, they had the existence in the customer network, and our challenge is how to do that. We continue to invest -- as we said-- we continue to invest in order to maintain this gap.

Although we believe that we are in front of our-- that we have advantage over competitors on the technology side, we continue to do investment in order to bring and to maintain this leadership with the product that will be introduced during the next few quarters.

Thank you, Arnon. And maybe just a following up on that, David. Can you give us a sense on the leverage or how much will you need to invest for the growth, going forward? Also, do you expect to see sequential rise or just growth on a year-over-year basis right now?

In our market, basically, it was a real-- it's not sequentialized and they also received in our customer. So we believe that this is what we will see in usually our first two quarters are slower than the previous fourth quarter. However, this year, we expected that at least the third quarter will be around the same level.

And the investments required to expand your presence and overall infrastructure worldwide. How do you envision that going with the growth ahead of you?

We-- our breakeven for this $5 million, we said that above the $5 million, although we have about a 67% growth margin in spite $0.50 in each dollar at the topline came closer to about $0.50 to the bottomline.

We believe that this model -- we can maintain this model until we can achieve about $30 million. Although we said "about" because we see a need to increase mainly in the sales and marketing, but we keep our expenses in -- and you will note we believe that we continue to grow around -- we continued to -- we will grow our operating expenses less than the growth in the revenue.

Thank you, David and Noni. And good luck going forward.

Thank you very much.

And your next question comes from the line of [Jeremy Chappell] from [Keys Capital Management]. Please go ahead.

Thank you, and good morning. And congratulations on your results.

Thank you very much.

Thank you.

I'd just like to talk a little bit more about the scope of your opportunities in China, and typically the timing, how that may be affected by the Chinese government's position on 3G deployment? And then, also, if you could give us the -- little bit of background on the sales module that you think is going to be most effective for developing that market? Thank you.

I must say that the Chinese market is a very challenging one. And the reason for that is all the rules that are really, I believe, in other places are not identical to China. That was the reason that about a year ago, we decided to take a Chinese guy that has a lot of -- as a divergent of a -- Agilent in the system sales, so he has a wide knowledge and experience in this area.

So we started by building the relation with the vendors. We believe that's the vendors, and we see that today that participate in the trough that's done across the country. We'll be a dominant player in exposure of our solutions to the service providers. We're also solving problem to get to some of the service providers, but the relation we have in this market with the vendors are very important for us.

And recently, we heard that the government is going to issue the licenses for the TD-SCDMA in mid 2006, while UMTS and CDMA will only be granted at the end of 2006. We took this into account and, in fact, we developed with the vendors -- and that was part of the working with the vendors -- we developed this support for the TD-SCDMA. So we already have sales through the Chinese vendors of TD-SCDMA their best tools.

We believe that the first stages -- and this is 2006 -- we will sell mostly test equipment for the pre-deployment. We believe that in 2007, we will see more of the monitoring systems. We believe that a part of that will be done with direct sales. We will increase the stock in the Chinese market in order to take advantage of these opportunities, but we will also work with some of the partners in order to have the right exposure within the service providers.

But we do believe that there is a lot of opportunity. It's very difficult to forecast this market. But we are very encouraged that during 2005, we've seen increase in our presence, in our sales in the Chinese market in a level that allows to have more confidence in our ability to penetrate this market.

Okay. And when you're selling to vendors, you mean the domestic Chinese vendors, people like Huawei and ZTE presumably would be your prospects?

And iDEN. No, they're not prospects, they are our partners. We already sell to them. We sell both to, say, all of them to Huawei, iDEN and ZTE.

Very good. Thank you.

Thank you.

And your next question comes from the line of [Steven Rudnitsky] from [USIP]. Please go ahead.

It's USIP. And first of all, congratulations. I know you guys have been working extremely hard, and we do appreciate your efforts. Two questions -- one is for Noni, and the other one is for David. Let's start with Noni's.

Noni, could you just give us more flavor on what the IMS testing suite is? I think people don't understand how powerful it is and how it gives us a competitive advantage, going forward? And then, I'll give David's question next?

Currently, the situation is that the IMS -- maybe, I'll start [study] further concerning that what is the IMS. Those who are represented know that apart of our vision and this is a vision that we had a starting that I created in the Company from '99 was that there is -- at the end of the day, it will be a single network that all the different technologies and assets will be connected to a single infrastructure.

That is cable or wireline/wireless, cellular or today WiMAX or whatever. We didn't know at that time what is the name and how to create this cloud, but today the picture is better understood, and today we refer to that as the IMS. And the IMS is the ability to provide standard services over different networks.

And I think this is the only standard that exists today that was agreed on different forums and bodies like the cellular, wireline, etc cetera. We -- what we have done in this area, we look at that as always with new technologies in two stages.

The first stage is our ability to support the vendors and also service providers in their trials with test equipments for their labs. This includes simulation of certain areas of the IMS and the ability to do troubleshooting and confirming the protocols that are running over the IMS network.

Next stage, what we are going to offer is the ability to monitor these different services as a part of our Omni-Q product. So we are looking at that as always with new technology, as our strategy is to offer solutions for test equipment for the lab that will include troubleshooting and simulation, will enable us to work with them, to understand, and to have the experience with the new technology.

And by that, we will be the first to be able to such solutions into the live network, as these two products are a single platform. I think the question before was what are the advantages that we have?

For instance, if you take Systronics, they have two product lines. One line that is coming from Germany, the K15, which is a test equipment for their lab. The other one is the Inet, which is for live network.

Our solution is a single one, which means that if we develop a solution for IMS in the laboratories, we can move that into a live network by adding only the management. And this is one of the advantages. As a small company, we need to be more efficient and more creative in a way that we bring solution to the market.

So the key, Noni, if I got it right, is that basically we are the first one to provide a solution across these two product lines. That's kind of something that may be as efficient as testing, but that's really where I see the advantage being.

I think we are the only one who is capable of doing that. All the others will need to develop in parallel. They are offering such solutions in their test equipment, but not in the monitoring, as it doesn't exist today. So when it will move into the network, they will need to develop it, while we already have it because we can move -- we'd assume it's the same platform that supports the lab equipment and the large network.

And so that gives us a pricing advantage as well?

This could give us the ability to participate in the trials and to have-- and this is what we have done also with the 3G-- what we are doing right now in China. Our ability to support the customer in the first stage of the trials in the labs and his ability to take the same product, he already know the product, he understands what it gives and move it through the large network. This is one of the advantages that we have in early stages by being first into the market.

Okay. And David just checking on the math. It's a little on the west coast of you, so it's a little early in the morning for me. But on 20 -- if it gives 25% year-over-year sales which gets us to roughly $28 million and using your number of every $1 over $20 million gets us $0.50 in net.

What do we use, we use 16 million shares -- is that a totally diluted amount that we could, I don't know, we should earn about $0.50 for next year? Is that about right?

We didn't give any projection for the full year of 2006. What we can say at this point in time is only for the first quarter, this is the guidance that we gave. But as I said, we believe that the structure of the company, the structure of the operating-- the operations that we had, we can maintain a sales around $28 to $30 million.

Although, we believe that when we start to reach this sales level, we will have to invest in marketing and maybe in other direction that we have in mind. So we believe that the model of -- each dollar at the top end can contribute $0.50 to the total amount, we can maintain this model up to $28 million.

I'm just checking on the math and not asking for projection. But if we do the 25% year-over-year growth, that gets us to roughly $28 million in change, and am I correct in using 16 million shares as being fully diluted at that point?

Correct.

And so it will give us $8 million on 16 million shares which would be $0.50 per share on the low end of that range, just from a math basis?

I would say $8 million because we say that about $20 million a year, only $0.50 go to the bottomline. So it's $4 million.

Sorry $4 million. Okay, got you. Okay, thanks very much.

Thank you.

[Operator Instructions] And there are no further questions.

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

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