Radcom Ltd (RDCM) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Radcom Ltd. first quarter 2007 results conference call. All participants are at present in a listen only mode. Following management's formal presentation instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded April 30, 2007. I would now hand over the call to Ms. Noga Fisher. Ms. Fischer, would you like to begin?

Thank you, Abigail, and thank you all for joining us. With me today are Radcom's CEO since April 1st, Mr. David Ripstein, and 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 Companies 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 reconciliation of GAAP to non-GAAP financial measures which are included in the press release. The Company does not undertake to update forward-looking statements.

Now I would like to turn the call over to David. Go ahead, please.

Thank you, Noga, and thank you all for joining us today. As we said in the press release, we are very disappointed with our first quarter results. Clearly these are not the type of result I wanted to report in my first conference call as CEO. However, they do give me opportunity to set the policy of openness and transparency. Since I took over as CEO on April 1st my first task has been to clarify the reasons behind the shortfall and then to begin correcting them.

Over the past month I have carried out intensive assessment activities across the Company, and I have also met with key customers and distributors. Although the process is not finished, we do have enough information to draw conclusions and to set out a new work plan. Taken as a whole way we see two main problems. Delays in number of large 3G cellular projects that we have projected to close during the first quarter, and execution problems within the organization. The good news is that our markets are still very large with a strong need for our product and that we know how to fix the execution problem and more importantly, that we are going to fix them.

As such, although we are disappointed with our result, we remain confident. I would like to take advantage of this conference call to discuss our account status in detail and to lay out our work plan. I will start with the delays that we are seeing on the cellular side of the business. In our original projection we had expected to close several new 3G cellular projects during the first quarter. But each of these projects has delayed. To our knowledge, none of them have been canceled or won by other vendors and since the beginning of the second quarter one of them from the Far East has come in. I do believe we will win most of these projects at some point, probably later in the year. But we have no clear commitment regarding the timing, and we have learned from experience that we may also see delays in other projects scheduled for 2007.

In addition, we are also seeing longer sale cycles across the board. In this environment we obviously need to increase the number of live deals that we are working on. This is a key goal of our work plan. Besides reaching out to more 3G cellular operators we will also reach out more aggressively to additional markets, including cable operators, MSO and IPTV early adopters. We will also work to increase our penetration of existing customers.

In light of the slow 3G wireless [terms] we will exercise GSM and GPRS opportunities, an area that we believe offers a lot of immediate opportunities. With that contributing revenue these sales are a good way to establish relationships with the operators that will roll out 3G. As to our execution issues, we have identified a number of specific problems. In the Far East for the past nine months our server organization has been operating without a manager. Now our retail sales will start feeding the gap temporarily as we work on a permanent solution.

In the U.S. although the pipeline increased during the last few quarters we continue to have difficulty turning opportunities into sales. We have taken a number of initial steps to solve the problem, and I have made a personal commitment to achieve improvement.

On the Wireline side of the business we continue to see a ramp up in the scale of voice over IP and early IPTV deployments. We therefore expect the Wireline market to become an important opportunity for us in the future as we started seeing last year. In fact, early reaction to our new IPTV offering has been encouraging. Our ability to provide in-depth analysis of the video streams, including passive modes and [ampac] is unique in the market. The trial of our system in a leading European ILEC has gone very smoothly, and we believe this will translate into business during 2007.

In addition, we are happy to see additional convergence of large Wireless and Wireline operators. This is a direction that we expected the market to develop, and we therefore built our product as a single solution for monitoring both Wireline and Wireless networks. I'd like to stop here to let Jonathan review the highlights of the financials. Then I will come back to sum up and take your questions. Jonathan, please.

Thanks, David. Since you have the results in front of you I will focus on the highlights of the quarter. Revenues for the quarter were $3.2 million, 62% of our sales were through wireless operators and about 30% were to the wireline operators. The remaining 8% were to equipment centers. The majority of our orders during the quarter were repeat sales to existing customers. As David mentioned, this reflects the fact that many new orders were delayed beyond the first quarter.

We had one deal that was above 10% to a new customer located in Europe. On the geographical basis our strongest region remains Europe, which accounted for about 53% of our sales. North America accounted for 32%. Asia Pacific including China for 12% and Latin America for about 3%.

Gross margin for the quarter was 55%, reflecting the low level of sales. As you know, our target range for the gross margin is 68% to 70%, and that assumes that we can spread our fixed costs over a broader base of revenues and is dependent on the mix of sales. We expect to return to the normal level when our revenues return to the normal range. On an operating basis our expenses are up by about 28% year-over-year. This is in line with our work plan for building the Company to the next level of sales, which reflects the addition of the new layer of management for our sales organization, the expansion of our presence in the Far East and, of course, continuing investment in our technology.

During the period we canceled a deferred tax asset of $115,000 that we recognized in 2006 in compliance with SFAS 109. This is reported as a tax expense in our income statement. On a GAAP basis we recorded $126,000 of non-cash charges during the quarter as part of our implementation of the SFAS 123(R) standard. This requires us to recognize the fair value of share based incentives as compensation expenses. This is nearly the same as the non-cash charge taken in the first quarter of 2006 which was $128,000. Net loss excluding these charges was $2.8 million for the quarter or $0.17 per share.

Turning to the balance sheet, cash and bank deposits were $9.2 million at the end of the quarter. Based on our current projections we expect our cash balance at year end to be about the same. Current and long-term deferred revenues as of the end of the quarter were $2.5 million, similar to the level at the end of the fourth quarter. Our trade receivables decreased during the quarter to $9.9 million. This is still relatively high level reflecting the long payment terms that we have given some of our customers. We continue to monitor all open accounts and do not see any particular collection risk.

As to guidance, our shortfall for the first quarter together with our evaluation of our sales pipeline has led us to reduce our revenue forecast for the year. We expect the second half of the year to be much stronger than the first half, enabling us to record revenues of $21 to $23 million for the year. As part of the updated projections we forecast a return to profitability in the fourth quarter. Back to you, David.

Thank you, Jonathan. So to summarize we are addressing markets that are large and growing but have faced delay in 3G cellular projects. We continue to see a lot of opportunities in the marketplace and are increasing our sales activity to take advantage of them. We have identified some execution problems within our organization and are focused on solving them. I am confident that we will succeed. It will take us time to return the Company to growth and profitability, but we will do it. 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, please.

(OPERATOR INSTRUCTIONS). David Kanen, Pointe Capital.

Can you tell me how much of the business was voice over IP versus cellular?

As I mentioned the cellular part wireless was 62%; the wireline, the voice was 30%, and the remainder 8% was to (technical difficulty) vendors.

Okay. In your remarks you are attributing most of the shortfall to delays in wireless 3G. Why was voice over IP down quite a bit sequentially? Is there some kind of a slowdown there, as well, or is that an anomaly?

We compared when we said that we saw a slowdown in the wireless was when we compared to what we forecast; and we forecast a very strong quarter for the wireless. And we did [got] those deals, and therefore you saw the percentage still high in the cellular. But it is not what we expected it to be. Did I answer your question?

Still voice over IP had a meaningful drop so was there an execution issue there, as well? I mean, you were running probably -- you were doing around 3, $3.5 million a quarter in voice over IP prior to the last two or three quarters. 3/4. Is that about right? I am sorry, maybe not quite that much but let's say 2.5 to 3.5.

Regarding the numbers I agree, but you have to understand that we are dealing or starting to deal with bigger deals and we cannot look on a specific quarter and define a trend according to this specific quarter. So this is why we don't see anything unusual with the voice over IP.

And a question for Jonathan in regard to operating expenses. The model that you communicated last quarter was breakeven $5.5 million, gradually moving up to $6 million by the end of the year. Is that still in place, or has it increased operating expenses to enact your sales initiative and now that the breakeven level is higher?

When we look at 2007 basically the breakdown of expenses is the same as we talked of before and now where we are at a level of sales that we had in the first quarter. So when we look at going back to profitability we are looking as I mentioned at the fourth quarter getting back to profitability, and not to have all quarters possible like we mentioned beforehand.

But the breakeven number exiting the year, is it still $6 million?

That is the thumb rule that we use also going forward yes. But the caveat as I mentioned that we are now talking about lower levels of sales, and the percentages like we saw for instance in our gross margin which are very different than they used to be in prior quarters that of course is a result of the lower level of sales. So that is why I am just sort of alerting to the fact that the same percentages that you were used to looking at us and expecting to see in prior quarters at higher levels of sales, we have to now wait until we do get to that same level again. And as I mentioned, that will be in the latter part of this year.

David, if you could give me a little more granularity on the pipeline and you made reference to the size of the deal has been larger. Like for example, this deal that you said you closed already in the Far East, are these 6,7 figure deals in the $3 to $5 million range, or still in the $800,000 to $1.5 million range?

We are not sharing numbers of the exact amount of the pipeline we have but specifically to answer your question about the deal in the Far East, it is six digits but still a very nice one.

It's a six-figure deal --.

And the good thing with this deal is that it includes our R70, our new platform for the cellular. And this is the first trial of our R70 cellular (inaudible).

Okay. Do you expect -- I know you're not expect profitability until the fourth quarter but in the second quarter from these very low levels of revenue, do you expect improvement from Q1 to Q2?

Yes, we are.

Okay. I'll let someone else ask questions. Thank you.

Jeffrey Meyers, Intrepid Capital.

Can you talk a little bit about the competitive environment, who you are seeing and any of the competitors coming out with new products that are pretty good?

I think nothing has changed in our competitive environment as much as we see it and feel it. We have two main competitors that we are considering as competitors. [inet] Tektronix is the first one, and the second one is Agilent. And as we mentioned, we almost didn't lose any project this quarter. Regarding new product or new activities from other players, including those two, we didn't notice anything new or something special.

I'm just curious how are you going about adding smaller, new smaller deals to the pipelines that have -- are you having to add salespeople, or how do you focus on that, I guess?

We used to have a policy that we are more focusing on deals that we think that we will win. And always have some nice opportunity without access. So now we are pushing more our force to more opportunities and I prefer to lose deals and not to be in the situation we are today. So basically we will take the policy of doing more with less. Do more activity in the field with the same results we have today or according to the plans we established for 2007 and I believe we will win more and maybe we will lose more also.

Maybe you can talk a little bit about partnerships and partners you have now and partners who you are working towards getting -- maybe some of the bigger guys?

We have activities to combine our efforts, especially our sales efforts with some leading vendors, but currently we don't have anything to announce and information that we can share.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Steve Bick, Cottingham Management.

I just have one question. If [these] sales have been delayed and the guidance has been cut by 25%, I'm just a little bit confused as to have sales actually been lost before or why is the guidance been cut so dramatically?

The reason now that we did analysis and we look on the nature of the behavior of our customers and we don't believe that we have high probability that we will be able to gain those numbers that we lost in third quarter and to push it this year. So we believe everything will be delayed, and we lost (inaudible) of dollar compared to what we forecast this quarter. Additional to that we think the situation in the cellular is a trend or at least we suspect it to be a trend. This means that in the coming quarter we will also see some delays. And taking that into consideration leads us to the number that we provided to the market.

And you think by the fourth quarter then to be profitable it is about a $6 million run rate and hopefully accelerating from there?

That is correct. That is the bottom of our guidance that $6 million that you just mentioned.

But breakeven on a cash basis? Cash-flow basis?

As I mentioned, Steve, we are looking at a similar level to the 9.2 that we have at the moment in the bank, to also have at the end of the year.

All right. Thanks.

Arthur Winston, Pilot Advisors.

Did you just say that you anticipate given with the sales estimate that you have that the cash situation at new years will be more or less identical to today? Is that what you said?

Yes, [corrected] part.

My next question is given that the Company has elevated every kind of spending that you can think of and so forth not much has come of it, isn't there any opportunity to find expenditures that have been foolish and cut them now so that you can in effect try to resuscitate and regrow the business while not spending as much as you had? Because so much of the stuff has proven to be a waste of money?

I tend not to agree that we here had a lot of things that we can consider as a waste of money. But Jonathan started to build this month a plan to reduce our plans or our costs a few percentage. But in general my target is to increase the income and not to block activity at least not dramatically.

Thank you.

[Steve Root], [USAP]

I am just a little -- I know you have answered this but I am almost astounded by the answer. Your expenses are basically going to go up by $500,000 per quarter?

That is what we mentioned. We didn't mention that too much today. We actually earlier this year what we had mentioned our breakeven point at the end of 2006 was something $5.5 million and we're looking forward in 2007 we said going up to about $6 million. That of course is at different revenue levels than we are talking about today, and that are for the thumb's rule of our cost basis tends to behave. Of course now we are in another ballgame but we do hope to get back to the same rules of thumb by the end of 2007.

But right now we're looking at $6 million per quarter breakeven?

I tend to look at the moment at the end of the year and saying that is where we will be. But where we are with the sales I do not want to people leaving this call with the feeling that the costs of fixed are such and now we are just looking at what the income. I think it is hand-in-hand and to get back to where we were and to watch people who are used to look at us, that will be as I mentioned by the end of the year and not before end.

And the best we come out with for this plan is that hopefully we will be at breakeven in the fourth quarter which really means that our revenue projection is extremely back -- obviously by definition is extremely back end loaded. And therefore just from my own perspective -- tell me if I have it wrong -- that we basically have no visibility to that revenue. If it is three quarters away we are saying we don't know when it's going to come in, so we will say it is the fourth quarter. And that is how I interpret it, is that a wrong interpretation?

I think if you have been on our calls and heard what we have said in the past one of the reasons why we have moved now to the annual guidance and not to the quarterly guidance, actually because of the timeframe of closing these deals, which is not a few months but its much longer than that. Of the visibility actually in the six to nine months we do have that visibility; saying that and again looking at this quarter is probably a bad example, is when you had those deals on the table and there was a talk that they would close during the quarter. They did not close but they were pushed out. (multiple speakers)

I understand it. I don't want to cut you off, but I just want to get to the top. If in the third quarter your visibility tells you -- we didn't have visibility at the end of the fourth quarter to accurately predict at the end of fourth, Q4 '06, to accurately predict Q1 '07. But we've got sufficient visibility at Q2 or end Q1 '07 to predict Q4 '07; and if we find that in Q3 '07 we are not going to make our Q4 number, will you guys revisit the expense side at that time? Will you at least commit to revisiting the expense side of things at that time?

Yes, I think what (inaudible) to be a few issues that I would like to relate to. First of all we continue to review our expense level ongoing and we do not wait for some future time in the future, although what we have just mentioned that our focus here and where we think the issue is, is not on the expense side, but on the sales side. And that is where we are focusing, and that is where we currently at the end of April 2007 we think that we need to spend our time and effort to increase our sales. That is one thing.

The other thing is that looking at the deals that we have and that hopefully we will have in the future quarters of this year, I think again the way to look at it is on the annual graph and not on the specific quarter to quarter situation. And that is the way that we think that the market should look at our performance going forward.

Thanks very much.

Pleasure.

David Kanen, Pointe Capital.

First if you guys looked at your pipeline compared to last year would you say that the average deal size is larger or basically the same?

The average deal generally speaking is larger due to change of moving from troubleshooting to monitoring. And this is the project and the opportunities that we are looking for, so the answer is yes.

And on the IPTV side, can you give me an update as far as where are you guys in terms of having a fully scalable carrier grade product that can monitor quite a bit of traffic right now? Would you say that you have a product that is ready to go or more something on the trial level?

What we have is the same concept of the Omni-Q, meaning monitoring any generation network, and maybe you know the Omni-Q and the R70, the same system, the same product can monitoring any generation network. It can be wireless, voice over IP and also IPTV. And we just finished doing the IPTV adjustment for the R70, meaning to give the R70 the product capabilities of monitoring IPTV network. We finished that. We went into a leading ILEC in Europe, and it was a very, very successful better site for us and I hope it will end with a six-digit sale during even this quarter.

The things with the IPTV that we see based on preliminary penetration activities that we did, we see that there are some new networks that are coming. Most of them are more trials so those who are early adopters and wanted to plan their network started to speak with us about monitoring the network. We are not doing troubleshooting. We are doing a monitoring for their IPTV network, and it is very complicated network. And our philosophy and belief and also strategy is that those customers, it will be a must for them to have monitoring. But I don't see big network coming this year. So we believe as we will be able to sell a few orders for IPTV this year, this is our focus. But the main numbers and the main (inaudible) will come in 2008 and 2009.

Thank you. Good luck.

Thank you. There are no further questions at this time. Before I ask Mr. David Ripstein to go ahead with his closing statements I would like to remind participants that the replay of this call is scheduled to begin two hours after the conference. In the U.S. please call 1-877-456-0009. In Israel please call 03-925-5929; internationally call 972-3925-5929. Mr. David Ripstein would you like to make your concluding statements?

Thank you for your support of Radcom and for participating in this conference call. See you next quarter.

This concludes Radcom Ltd. first quarter 2007 conference call. Thank you for your participation. You may go ahead and disconnect.