Radcom Ltd (RDCM) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. fourth-quarter 2006 results conference call. All participants are at present in a listen-only mode. Following management's oral presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded February 5, 2007. I would now like to hand over the call to Ms. Noga Fisher, the investor relations counsel of RADCOM. Ms. Fisher, would you like to begin?

Thank you, Regev, and thank you all for joining us. With me today are RADCOM's CEO, Arnon Toussia-Cohen, and its CFO, Jonathan Burgin. By now, we assume you have seen the preliminary earnings press release which was issued earlier 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.

In this conference call, management will be referring to certain non-GAAP financial measures, which are provided to enhance the users' overall understanding of the Company's financial performance. By excluding certain non-cash charges, non-GAAP results provide information that is useful in assessing RADCOM's core operating performance and in evaluating and comparing its results of operations on a consistent basis from period to period. The presentation of this additional information is not meant to be considered a substitute for the corresponding financial measures prepared in accordance with Generally Accepted Accounting Principles. Investors are encouraged to review the reconciliations of GAAP to non-GAAP financial measures, which are included in the release.

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 another good year for RADCOM. Revenues were $7.5 million. This was in line with our guidance and our highest sales since 2000. In fact, it was our 13th consecutive quarter of year-over-year revenue growth.

Until two quarters ago, the main driver of our growth was our success with NGN cellular operators. In the third quarter, we began to see an additional increase in Voice over IP demand; and in the fourth quarter, Voice over IP accounted for nearly half of our sales. This reflects a new scale of Voice over IP deployment in the marketplace, together with the significant challenge that Voice over IP operators must overcome to maintain quality services.

The fourth quarter was also the first time in our history that we achieved more than $1 million in net profit. As we have always said, the advantage of our business is that $0.50 out of each dollar above the breakeven point goes straight to the bottom line. However, in the fourth quarter, our performance was even better, with $0.60 of profit for each (inaudible) dollar sale above the breakeven.

I would like to take advantage of this conference call to give you more detail about our achievements during 2006 and to outline our strategies as we enter 2007. As I said, the fourth quarter was a good end to 2006. On a geographical basis, Latin America was especially active during the quarter. The largest sale in the region was to a Tier 1 fixed-line carrier that is using Omni-Q to monitor fixed line and Voice over IP services. The availability of our new R70 probe was the key advantage that helped us close the deal. In fact, they have already purchased about 20 R70s as part of an end-to-end system. This positive experience and others have confirmed our belief that the R70 is the industry's best-performing nonintrusive probe for cellular, Voice over IP, and IPTV next-generation networks.

Sales in North America was relatively weak for the quarter. However, we have a strong pipeline of North America sales and see a lot of good opportunities. As such, we expect to see growth in our North America sales in 2007.

In the Far East, excluding China, we have not yet reached the level of sales that we're looking for. We are taking action to improve the situation and continue to view the region as a target market with tremendous potential.

From an application perspective, sales of next-generation networks wireless monitoring systems continue to account for the largest portion of our sales. In 2006, the overall NGN wireless market did not grow as rapidly as it did in 2005. However, this is relative and we continue to see a lot of demand, reflecting the fact that NGN markets are still in the early stage of growth.

According to research, the overall market for wireless network monitoring solutions is about $300 million per year, with NGN networks currently accounting for about $100 million of that, the NGN demand growing at about 15% per year.

Importantly, Voice over IP demand is picking up. We have always forecasted that Voice over IP would eventually become a strong second leg of our business, and we believe we are on the right track. The market for Voice over IP monitoring systems was about $100 million in 2005, and it is projected to grow by about 40% over the next few years.

We are positioned very well in this market with the industry's most advanced portfolio, a blue-chip customer base, and a proven success helping operators solve voice quality and signaling problems. As such, we expect our sales in this fast-growing market to continue building and for Voice over IP to become a second strong leg for our business.

On the technology side, we continue to extend all our products. The RANalysis product that we announced earlier this year has now achieved initial sales, and we see a lot of interest for it in the market. It is truly unique, and we believe it will enable us to extend the range of our business.

In general, we continue to benefit from the fact that a single technology platform is at the base of our solution for wireless as well as wireline operators. This means that we can address incremental markets without additional development investment, thereby increasing our profitability as we scale up the business.

I would like to stop here and turn the call over to Jonathan to go over the financial reports. Then I will come back to discuss our strategies going forward and open the lines for your questions. Jonathan, please?

Thanks, Noni. Since you have the results in front of you, I will focus on the highlights of the quarter. Revenues for the period were $7.5 million, up 14% year-over-year and 12% compared to the third quarter of 2006. This is in line with the guidance that we gave last quarter. We saw quarter-to-quarter growth throughout 2006 and have now delivered 13 consecutive quarters of year-over-year revenue growth.

About 50% of our revenues were from sales to wireless operators and 45% were to wireline VoIP operators. The remaining 5% were sales to equipment vendors. We continued to close significant business with new customers while also receiving repeat orders.

As in the third quarter, our sales to new customers were higher than to existing customers during the quarter. This is in line with our goal to continuously build our customer base and then leveraging the base as a source of ongoing repeat sales.

On a geographical basis, our strongest region in Q4 was South America, which accounted for 37% of our sales. Europe accounted for 35%; North America for an additional 23%; and Asia-Pacific, including China, for the remaining 5%.

During the quarter, we had one deal that was above 10%, which was to a new customer. For the year, our sales were $25 million, an increase of 12% compared to 2005.

The geographical split for the year was 42% Europe, 30% North America, 17% South America, and the remaining 11% from Asia-Pacific. Sales to wireless operators were 57%; wireline operators were 38%; and sales to equipment providers were 5%. For the year, one North American customer accounted for more than 10% of our sales.

Gross margin for the quarter was 70%, the same high level that we achieved in both the second and third quarters and for 2006 as a whole. In general, the gross margin will fluctuate depending on the mix of sales; but we expect to be able to stay within our target range of 68% to 70%.

On an operating basis, expenses are up by about 14% year-over-year. This is in line with our work plan for [building] the Company to the next level of sales. It reflects the addition of a new layer of management for our sales organization; the expansion of our presence in the Far East; and of course, continual investment in our technology.

On a GAAP basis, we recorded $194,000 of non-cash charges during the quarter as part of implementation of the FAS 123(R) standard. This requires us to recognize the fair value of share-based incentives as compensation expenses. For the year, these charges totaled $558,000. In the earnings release, we have detailed the allocation, which affected all of our expense categories. The expense for 2007 is expected to be about the same.

During the period, we recognized a deferred tax asset of $115,000 in compliance with FAS 109. According to U.S. GAAP, we are required to recognize a deferred tax asset if we are more likely than not to take advantage of our accumulated tax loss carryforward in the future. Based on our profitability over the last few years and our projected profit for 2007, we have recognized a tax asset of $115,000.

I would like to point out that we have accumulated losses for tax purposes of about $60 million. Thus, we do not expect to have to pay taxes in the near future.

With higher revenues, strong margins, and moderate expenses, the Company has become more profitable, with profit far above our original expectation. For the quarter, on a non-GAAP basis excluding these charges, operating income was $1.1 million and net income was $1.4 million or $0.08 per share. This is up 69% compared to the fourth quarter of 2005, which also does not include share-based compensation, and up 93% compared to the third quarter.

As a percent of revenues, the operating margin is now 12%, and the net margin is 15.4%, compared to just 8.5% in the third quarter. So we are making progress towards our long-term target of 20%.

Turning to the balance sheet, cash and bank deposits were $10 million at the end of December compared to $11.4 million at the end of September. Current and long-term deferred revenues as of the end of the quarter were $2.6 million, slightly lower than the level at the end of the third quarter.

Our trade receivables are up materially to $12.6 million. As we told you during the last conference call, this is in line with our expectations, and we do not see any particular collection risks.

As to guidance, the progress that we have made in increasing our average deal size and selling systems rather than boxes has also made it more difficult for us to forecast on a quarterly basis. It is therefore more meaningful to provide guidance on an annual basis and to update each quarter.

For 2007, we expect our revenues to range from $28 million to $30 million, representing a growth rate that is in line with the growth of our target markets. We expect to continue to see an increase of our sales to next-generation network wireless operators, and for wireline sales to overtake wireless sales already in 2007. We expect to increase our expenses somewhat over the next year as required to support the rise in sales.

This will increase our breakeven point from $5.5 million today to about $6 million by the end of 2007. At the same time [as] steadily increasing sales we are aiming to reach our target model of 20% net income by the end of 2007. Back to you, Noni.

Thank you, Jonathan. So that's it for the quarter. In summary, we had a good fourth quarter, with strong sales and net income that was well above our original forecast. We continue to benefit from the growth of NGN wireless markets, and Voice over IP has emerged ahead of schedule as a strong second driver of our business. Our differentiating technology, particularly the R70, has positioned us as a clear leader in the monitoring technology industry and is opening the door for new customers.

As our revenues rise above breakeven, we have become more and more profitable and are moving quickly towards our goal of 20% net margins. Overall, we are pleased with our progress and optimistic regarding (inaudible) prospects. As always, thank you for the support of RADCOM and participating in this conference call. With that, we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) Blaine Marder of Loeb Partners.

Congratulations on a nice year. You mentioned a new customer in Latin America in the quarter, and I think this was the customer that you mentioned that was over 10% in the quarter. Is that fair is the question?

Yes, that is correct.

Okay, this is a new customer and is this -- the initial sale was all complete in Q4; so you would expect follow-on business from this customer in next year?

We expect a following order as they expand the network; and even we believe that during 2007 we will see additional business.

Okay, great. Then, your guidance is for revenue growth in '07 that is in line with the industry. Yet you would like to think that your product set is at the top of the industry, especially with the R70 and everything. Why the conservatism? I would expect you actually to be taking share. How come you think you're just going to grow in line with the industry?

We would like to be at this stage, especially after the beginning of last year, to make sure that we are focusing something that, no matter what happened, we can achieve.

I believe personally that it could be -- that there is good reason to believe that -- I believe that we could do better. But we will not tell it officially. And officially this is what we focus and we believe that we can commit for that number.

Very good. Understood. Then, regarding the first quarter, at least seasonally, would you expect the normal seasonality from Q4 to Q1?

Yes, I think that you will look at two parameters. One is Q4 to Q1, but also Q1 to Q1. We always really look at the year-over-year, and I think that this is the right way to look at that.

I must say one additional thing to the previous question. We will update the focus by a quarterly basis, which means by the end of next quarter if we see that there is improvement that we can do on the focus, we will update the market on that.

Fair enough. Then finally, Jonathan, the balance sheet, at least on the receivables side, has grown a lot faster than the top line. Why? Is this because you have a larger percentage of international sales? I mean, you would expect to catch up here when you collect on some of these receivables in the first half of the year?

Let's divide your question into a few parts. First of all, yes, your observation is correct. The international part is that we do sell to all parts of the world, as I have indicated with the split of geographical areas. As I did mention, the increase is in line with our expectations.

What we need to remember is that the credit terms are part of the business that we are in. We expect the level or the ratio between the amount of accounts receivable and sales to continue at this ratio. So it will depend on our sales going forward; and then the amount of accounts receivable, we expect it to behave in the same manner.

Saying that, it is not just a number that we sort of -- comes in and goes out, but this is something that we monitor very closely and look at these accounts on an ongoing basis. We do try and receive the payment as soon as possible. So whenever we can, we prefer to see the money in our bank than to see them in the accounts receivable. But as I mentioned, this is the basis of doing business with credit terms like they are.

Another issue that I think is important to remember -- that as we do monitor these accounts on an ongoing basis, we have not identified any credit risks that are problematic. So that is also important to see that we don't have any bad debt out there in the market.

Okay. Lastly, did I hear your comment correctly that you said you were targeting a 20% net income margin by the fourth quarter of '07? Is that what you said?

That is correct. That is what we are aiming for.

Great. Thank you. Thank you very much, gentlemen.

Arthur Winston of Highland (sic) Advisors.

It's Pilot Advisers, not Highland. Thank you for an excellent year. It was great. My first question is the Voice over IP, it's categorized within wireless when you give out these percentages?

No, the truth is, as we are saying, Voice over IP -- because it is the term that many people are using and we didn't want to confuse. But really what we are saying is the division is between cellular and wireless. In fact, some of the business in the cellular are Voice over IP technology in cellular. So the division is really between cellular and wireline.

Does that suggest that your traditional wireline business is probably really slowing down, it sounds like? The traditional, the old stuff, the old Company.

No, no. Let's divide into three. We continue to grow in the same growth that we have seen before with the wireless. What we have seen in the last two quarters is that the wireline is growing dramatically. What is slowing down is what we call the others, which is more the vendor and the lab type of business. This is what is being slowed down.

Okay, I understand what you are saying. The next question, what are the opportunities in China? It sounds like nothing is really going to happen to our Company before the Chinese Olympics. It is just starting out too slow.

There is -- we are not standing by just waiting for the 3G, although we do believe that the big opportunity will be when 3G is implemented in China. At the beginning of every year, the rumors are that things are starting to happen. But we are not counting on that because, as we did last year and the year before, the rumors were there but we didn't see, and we know that we can't count on that.

On the other hand, we did identify one or two opportunities that can create for us a nice business during 2007. So we do believe that the Chinese market is more than just the 3G, although there is no question that when 3G will be implemented and monitoring systems will be implemented for 3G, this is the large opportunity in the Chinese market.

Okay, my last question goes back to the last delineated source of growth that you had in your prepared remarks, before you turned it over to the financial discussion. I didn't understand what you were saying, the last thoughts on growth in your prepared remarks. If you can't find it, I will get you off-line if it is too much trouble to look for it now.

You're talking about the RANalysis?

What is it?

This is a new product called RANalysis.

R-U-N?

R-A-N analysis.

What is that?

Radio access network. This is a device that is designed for RF engineers. Now in the technology of the 3G of what is called a UMTS, a lot of information is conveyed by the terminals into the network. We are collecting this information by getting the lines and collecting this information, and create a database and an evaluation report to RF engineers that eases their life dramatically concerning understanding what are the problems in the RF that the customers are facing. And even some recommendation for optimization of the RF network, which has a great ROI because the other alternative is to send a technician to the field and collect RF information.

So now you are taking the terminals themselves and, by a specific algorithm that we invented, we can identify problems in the network by using the terminals that the customer is using. This is a device, an analyzer. This is an analyzer that can be sold to the RF engineers. It is really any service provider -- GSM service provider, not the CDMA but more the GSM -- that can utilize that in order to improve their RF network.

So we believe that this is a unique product. We don't know of anyone who has a similar product. We already sold this to at least the first customer, and we see a lot of interest by other service providers.

Why does it cost? What does the system cost to buy it?

The first system that we sold was -- the initial order was about $200,000. The full system will be -- and this is a relatively small service provider -- will be between $400,000 to $500,000. This will be completed during 2007.

So we believe and what we see is that it is relatively easier sell, because it is only sold to the RF engineers. There is no committees or RFPs or things like that. So I personally have a lot of expectation that this will create additional business above the monitoring that we are working on.

Thank you very much.

David Kanen, Pointe Capital.

Congratulations on the quarter, first. A couple questions. With regard to this South American customer that was greater than 10%, can you give me an idea as to how many subscribers they have?

No, but I think that we mentioned that it is a first tier, so it is a substantial [company].

Can you disclose which country it is?

No.

Okay. Let's see, what else? As far as last year, your big customer on the wireless side in North America, can you give me a sense as to where they are in the process of deploying monitoring systems on their wireline business? Is that something that is up for grabs in '07? Or is that longer term?

It is very difficult for me to answer for them. I know that they are working on that. There are RFPs. But I can't really say what is their schedule for that.

Okay, so there is an RFP process right now?

There is some RFP, yes.

I see. And then I missed something in the prepared remarks. I just wanted to get the percentage of wireline versus wireless for the quarter.

The wireless was 50%.

How much?

Five zero, 50.

Okay.

Wireline 45%, and the remaining 5% equipment vendors.

And this was for Q4?

Correct. Do you also want the number for the annual?

No, that's okay. I think that a lot of my questions were answered previously. But just a final question. In the pipeline, if you had to give me a sense -- and I know this is hard to do -- as to how it is skewed for wireline versus wireless, how does it kind of divvy up right now?

We have the number, it is not very difficult; but we are not really releasing this number. But I can say that as we indicated, that we see that the wireline is growing faster than we have seen other areas, but still both of them are very healthy.

I see, okay. Great, thank you. Good luck for the year.

Jeff Meyers of Intrepid Capital.

This is a quick question for you. I know in the past you have talked about difficulty getting into some new larger accounts just because of your size; and you're working on different partnerships. Maybe can you just talk about the various partnerships you're working on now and how those are going?

Unfortunately we don't -- we are not allowed to give a particular, because we are not -- the partner does not allow us to do that. We have some agreements and we have some progress in this area.

We have started seeing some business of that. It is still not in the level that I would say we would like it to be. But the progress is as we expected. I believe that during 2007, we will see additional business from this direction.

I see. Would you say it is more skewed towards the big consulting companies, or is it more with the network equipment vendors?

Network equipment vendor.

Got you. Okay, thanks. Congrats, guys.

(OPERATOR INSTRUCTIONS) [Adee Price] of Price Capital and Co.

I had a quick question for 2007. I know breakeven is going up to 24 at the end of the year. For 2007, can we just use about $23 million, I guess, the midpoint between the 22 we are at now?

Yes, I think that would be correct. We indicated that the $6 million per quarter will be at the end of the year, not the beginning of the year. So we should see a gradual increase from the $5.5 million to the $6 million.

Okay. For the portion that hits the bottom-line revenue over that breakeven, I know we were higher in this quarter; is 50% on the conservative end?

We continue with our basic model of the 50% as you call it above the breakeven point. I think that is how we are looking at 2007.

Okay, so I just want to make sure I am doing the calculation correctly. So we could just take 28, which is the low end of your 2007 guidance, and if we subtract the 23, you get $5 million divided by 2, 2.5; and dividing that by the 16.7 million shares outstanding we get conservatively $0.15 in 2007. Is that correct?

Yes, just to point out that it is the fully diluted, not the basic.

Right, right, the fully diluted, $0.15 on the low end. You said you guys have $10 million in cash right now?

Correct.

And that is going to be coming up? Are we generating cash right now?

Basically yes, as we go up and we are profitable; and as you just made your calculations along that basis. So part of that, of course, will go into our cash.

Okay, my other question was I remember last year we had an issue collecting revenue from one of our customers. Not collecting, but recognizing, rather. And that -- I think we were going to -- it was delayed until Q1 2007, I guess, this quarter. Can you guys give us a little color on that? Am I right? How much? What is the general range? Is that about $1 million? Is it under? Is it over?

No, it was smaller than that, and it could be the end of this quarter or beginning of the next quarter.

Okay, so smaller than that; are we talking in $500,000 range?

Something this range.

Okay, good. Thank you. Thanks, guys.

Blaine Marder of Loeb Partners.

In the past, you guys have talked about acquisitions as maybe helping you get to the next level of sales. I assume that is excluded from your guidance for '07. What are you looking at in terms of the acquisition pipeline currently? Thanks.

First of all, it is excluded of course. This is just on our internal growth. We are still -- not still -- we are looking for that actively. We have a few opportunities, and when we have more information we will announce it.

Does that answer your question, Sir?

Yes, thank you.

David Kanen of Pointe Capital.

Can you tell me for the quarter how much came from direct versus partners?

Yes. As you know that our sales in North America are direct and the rest of the world we sell via distributors, so the direct amount is 23% of our sales for the quarter.

Okay. So is it --? My take on that, and just correct me if I am wrong, or feel free to interject with any comments, is that going through partners -- because you're a small company dealing with larger carriers -- going through partners has been a help? It helps you to more effectively compete with your larger competitors? Is that correct?

I think that the question is -- and I am not sure when you say partner what you mean. When the questioner -- previous question concerning the partners was concerning some strategic partners that are equipment vendors.

This is not the case. When we have just now your question concerning our partners was relatively -- are the distributors. We call them partners, and they are relatively small companies that we have to do the -- they are doing that, but this is not their forte, the relation with the big guys.

In order to overcome the first few relations, that is why one of the issues that we have done -- it is not the only thing that we are doing. It's one of the things that we said that we will do, is that we will try to connect to partners, equipment vendors or others, that can lead us into this first tier. This is not -- when we say partners, the 80% or 75% that we sell to partners, what we mean is the distributors that we are selling to.

I see. Okay, thank you.

[Steve Rudinsky] of [USIT].

Good job. I wanted to just follow up on the prior questions on our [income] for next year. We have got a low end of roughly $0.15. Taking the calculation without any adjustments through the year, the high end would be about $0.21?

Yes, correct.

We probably will have about $1 per share in cash and equivalents? When I say cash and equivalents, I'm talking also about your short-term bank deposits.

Yes, we look at them as the same. They are short-term deposits and the cash; and, yes, that is approximately the amount.

That is even with some growth in trade receivables to support the business?

Yes. Again as we said, that will go up as a percentage of our sales, as our sales are expected to grow up. That is the case.

Okay, and the high end of $0.21 doesn't account for any -- it is basically where we are today without any exciting new deals coming in?

You're right. And as the question was before, this is assuming that we are doing with the market -- according to the market growth.

Okay, all right. Thanks very much. Great job.

Adee Price of Price Capital and Co.

My question was actually answered.

Okay. There are no further questions at this time. Before I ask Mr. Toussia-Cohen to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-326-9310. In Israel, please call 03-925-5929. Internationally, call 972-3-9255-929. Mr. Toussia-Cohen, would you like to make your concluding statements?

Thank you very much. Thank you all for participating and we will talk with you again. Thank you.

Thank you. This concludes RADCOM Ltd.'s fourth-quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.