Radcom Ltd (RDCM) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. second-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 July 23rd, 2007. I will now hand over the call to Ms. Noga Fisher. Ms. Fisher, would you like to begin?

Thank you very much and thank you all for your patience. We apologize for the technical difficulties on this call that were beyond our control.

With me today are RADCOM's CEO, 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 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. 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 operation 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 this 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. The second quarter was another disappointing period, reflecting many of the same factors that we discussed in the last conference call. It also reflects the fact that one of our major customers in the U.S. has reduced their orders. This was one of the major factors behind the quarter's shortfall.

However, the situation is actually a lot more upbeat than it appears in the results. We have made a lot of progress since the last conference call. As you remember, at that time, I had just taken over as CEO and we were just in the process of finalizing the Company's work plan. Since then, we have been executing it, a process that takes time. Although, you cannot see the focus in the results, yet, you'll see significant improvement during the second half of the year and we are on track with our plans to return to profitability in the fourth quarter.

During this conference call, I would like to read review our account status and to give you more insight into our markets and opportunities.

I will start with the Wireless market. As I reported last quarter, in North America and Europe, we continue to see a slowdown in the rate of 3G cellular deployment. As a result, several [morning] joint projects that we expected to win have been delayed and the new starting dates have not been rescheduled. To our knowledge, the majority of these projects have not been canceled or won by other vendors. I continue to believe we will win most of them. Therefore, our strategy in this environment is to increase the number of [live] deals that we are working on at any one time with new customers as well as existing customers. This is a key goal of our work plan and we have already succeeded in expanding the pipeline. We expect to begin reaping the initial benefits this year. In the developing world, especially in Latin America, Eastern Europe, and the Far East, we currently see the potential for larger opportunities in a less competitive environment. In Latin America, our sales team is working very well while in the Far East, we continue to build our sales organization.

China is a different market with its own dynamic, and we are still waiting for Chinese 3G deployment to begin. In the meantime, we have been seeking out opportunities in Voice-over-IP and 2.5 generation services. These are extremely competitive markets due to the local solution providers.

After the wireline opportunity, Voice-over-IP continues to be an early adopter market with the majority of telcos and cable operators not yet offering Voice-over-IP full services. Those that have rolled out these services have become a good market for us because they are feeling the complexity of the technology and quality problems. We are confident that the majority of these players will offer Voice-over-IP services over time, creating a large opportunity for RADCOM.

We also see encouraging signs regarding the need for our IMS and IPTV solutions. We believe our technology in both IMS and IPTV together with our product's positioning as a multi-technology and next generation solution position us to benefit from the growth of both these markets. We expect to see initial IMS and IPTV monitoring sales later this year and to achieve more substantial sales in mid 2008.

Regarding our budget plans, our goal has always been to conserve cash wherever possible, but at the current level, this has become even more important. We have recently put a cost-cutting plan into place, which Jonathan will discuss in more detail. We have made these cuts in a way that preserves our technology leadership and enables us to continue growing the Company.

I will 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. Revenues for the quarter were $2.4 million. This is obviously far below our expectations. About 50% were to Wireless operators and about 45% to Wireline operators. The remaining 5% were to equipment vendors. Most were repeat sales to existing customers, demonstrating their satisfaction with the products. Gross margin for the quarter was 44%, reflecting the low level of sales.

As you know, our target for the gross margin is 68%, which assumes an ability to spread fixed costs over a broader base of revenues. We expect to return to our normal level in the fourth quarter when our revenues return to the normal range. As David said, we have already put into place a cost-cutting plan to help bring us back to profitability. However, we do intend to continue folding out our sales organization, which is critical for achieving our goals. For the second half, we expect our breakeven point to be in the range of 5 to $5.5 million, depending on the mix of products sold and other factors.

Sales and marketing for the quarter was particularly high as it included a liability of $345,000. This represents an arbitration verdict rendered in a dispute between us and Qualitest, which was previously one of our distributors in Israel. On a GAAP basis, we recorded $138,000 of non-cash charges during the quarter as part of our implementation of the FAS 123R standard. This requires us to recognize the fair value of share-based incentives as compensation expenses. Net loss, excluding these charges, was $3.3 million for the quarter or $0.20 per share.

Turning to the balance sheet, cash and bank deposits were $5.3 million at the end of the quarter. This is obviously lower than we would like it to be. We expect the cash balance to go down slightly through the end of the year, reflecting the timing delay between revenue recognition and collections and then to begin building again throughout 2008. Current and long-term deferred revenues as of the end of the quarter were $2.8 million, up slightly from the level at the end of the first quarter. This represents warranty income that will not be recognized in future periods.

As to guidance, given the difficulty of predicting the timing of delayed projects and the internal processes that are underway, we are temporarily suspending our revenue guidance. However, we expect a much stronger second half and continue targeting profitability for the fourth quarter. Back to you, David.

Thank you, Jonathan. So to summarize, we are making progress according to plan designed to increase our sales pipeline and to address our execution issues. We have always been and remain very focused on our cash. We are working to build sales in developing regions while increasing our activities in North America and Europe. We are addressing opportunities for the immediate as well as the long-term and expect to return to profitability in the fourth quarter. This has been a difficult first half of the year, but we believe we are on the right path. We look forward to reporting better results in the near future. Thank you for your support and for participating in this conference call. With that, we will be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). David Kanen, Pointe Capital.

Good morning. First, guys, I applaud your cost-cutting initiative. It seems like it makes sense to me given the lower fund rate in revenue. One would think you would get some leverage at some point later in the year.

As far as -- it seems like you've got a lot more optimism now for the second half of the year. Is part of that due to entering the second quarter at this juncture with some orders already that you are tracking a run rate well ahead of first and second quarters? Is that part of it?

I think the optimism that we are sharing with you is based on the opportunities we see and the maturity of those opportunities.

Okay. Have you closed meaningful business though at this point in the quarter?

I cannot share with you this -- this is part of Q3 progress.

Okay. As far as the pipeline, how does it break down of next generation of wireline versus wireless? If you could give me a sense of the percentages and your optimism, where is it coming from primarily? And then also geographically, where is it coming from?

I will start with geographically. It's coming more from the area that we will succeed to build a strong team in order to execute those sales. Basically, from the emerging markets, Latin America, but also from the traditional market from the U.S. and Europe. And regarding the wireless and wireline is something around 60% wireless and 40% wireline. So basically the same trend like we saw in the past.

Okay, and then as far as the cost-cutting, I implicitly get the number of operating expenses around $3.5 million a quarter based on a breakeven of 5 to $5.5 million in revenue. Is that right? And then, can you give me a sense as to where the cuts came from? Were there any cuts in sales? And if you can just give me some sense as to how it breaks down, which areas you were able to eliminate costs.

Relating to the cuts that have already taken place, as we mentioned, first of all, you sort of alluded to the sales. As I mentioned, actually in that area, we are expanding our sales force as we see that it is a crucial area to expand on so that we can actually execute those deals that we see out there. That's one, but on the other hand, we have cut expenses in other areas of the Company. If that's going down the line, we can see it in all the different areas of the Company. And the one area that it has not been cut has been the sales force.

Have you added salespeople?

Yes, we have and we continue to look to filling one gap that we have mentioned in the past, is a sales person for the Far East, and that is one area that we have identified and we continue to look and with the idea of finding somebody who has experience in the area and can help us bring home those deals that we see there in the Far East at the moment.

Okay. Do you guys see yourselves going forward doing more direct sales internationally as opposed to going through partners and distributors?

Yes, we will continue to go with partners and distributors, but we feel that we need to have them to execute especially relatively big deals since the process needs a lot of investment, technical investment, as well as sales relationships for a long process. So they need our support and they cannot do -- most of them cannot do the work by themselves. So this is why we are investing more in order to support them. And I think there is a nice and a good teamwork together with those partners.

Okay. I'll let somebody else ask questions. Thanks, guys. Good luck.

(OPERATOR INSTRUCTIONS). [Steve Wood], [USIP].

Did you ever collect the -- or I'm sorry -- were you ever able to record that $500,000 from the partner deal from last year that was carried over to this year?

No, we have not recorded that revenue yet. It is still an open issue as such.

Why is that? I don't quite get it. Hasn't the parts or haven't the parts shipped? Or what is the delay in that? Or is it not going to be recorded?

No, we definitely are working the direction that it will be recorded, but the way that the deal was structured is that we have ongoing obligations to fulfill and until we do not fulfill those obligations, we cannot recognize the revenue. Although the shipment that you alluded to, that was done some quarters ago, and the equipment is there, and the customer has started using the equipment. But until we don't finish the different obligations that we have and we cannot recognize the income there.

Okay. We've taken in the cash already, right?

There is an amount that we have received, yes, but there's still more amounts to receiving cash. And, of course, the revenue that you mentioned, we still have yet to record it in the income.

At the start of the call, if I heard you right, you said that there's a cutback in North America. I'm not talking about an expense cutback, but an order cutback. Did I hear that right?

Can you repeat the question, please?

Sure. In North America, there's a cutback in orders or in demand. Did I hear that right at the beginning of the call?

No, I think we didn't say that. In the focus, we see there a potential also in the U.S.

I'm describing it, obviously, I guess, the order rate for this quarter was lower, but I understand the optimism going forward. But I'm just saying, are we seeing that our clients in North America are just not right now ordering as much? And when I say right now, I mean right now.

Yes, basically you are right. What we said in the beginning that one of our major customers in the U.S. has reduced their order, yes.

And the seller who is in New Jersey, is he still there, the guy who runs your operation in New Jersey, is he still employed by you?

Indeed, yes.

He is? And how is that office working out?

I think we make some changes and then now I'm very happy with the aggressiveness and the fact that we see more opportunities and we are addressing in a difference tactic the market. (multiple speakers). So what I'm saying is that I am happy with the functionality and with the dedication of the team in the U.S. office.

Okay. And the cuts that -- working through the numbers it's basically you cut what, about $0.5 million per quarter in overhead?

That's approximately the amount, yes.

And do we have any onetime charges or cash outlay associated with that? It's not stated in the release but I'm wondering what it might be.

No, we don't. The only amount that is onetime in the current figures that -- of the second quarter is that liability of $345,000 that I mentioned. But, relating to the costs cuts, there's no onetime expense here.

Okay. I hope our optimism actually results in sales. I guess it's disconcerting and it's terrific to make optimistic, or sound optimistic, but the results are in the results. So, okay, guys. Thanks so much. Good luck with everything.

Thank you very much.

Thank you. There are no further questions at this time.

Before I ask Mr. David Ripstein to go ahead with his closing statement, 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.

First of all, we have a follow-up question from David Kanen of Pointe Capital. Please go ahead.

Yes, I may have missed this. You may have discussed this. The deferred revenue number, I see that it went up sequentially about $0.5 million. How much of that is service warranty maintenance contracts versus product that's going to go out the door?

Thanks for the question, David. As I mentioned in my remarks, the 2.8 is comprised of warranty income that we will recognize in the future quarters. So it is only warranty service maintenance as you call it and not related to products.

I see. Okay. Thank you.

Mr. David Ripstein, would you like to make your concluding statement?

Yes. Thanks for participating in the call and we will see you next time.

Thank you very much.

This concludes RADCOM Ltd. second-quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.