David Ripstein – President, Chief Executive Officer Gilad Yehudai – Chief Financial Officer Noga Fisher – Investor Relations

Abba Horowitz – Old School Fund [Jed Meyers – Alabaster Capital]

Ladies and gentlemen, thank you for standing by. Welcome to the Radcom Ltd. Third Quarter 2013 Results conference call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session. For operator assistance during the conference, please press star, zero. As a reminder, this conference is being recorded October 23, 2013. I would now like to hand over the call to Ms. Noga Fisher. Ms. Fisher, would you like to begin?

Yes, thank you Rachel, and thank you all for joining us. With me today are Radcom’s CEO, David Ripstein, and CFO Gilad Yehudai. By now we assume you have seen the earnings press release which was issued earlier today. It is available on all the major financial newsfeeds. Before we begin, I’d like to review the Safe Harbor provisions. Forward-looking statements in the conference call involve a number of risks and uncertainties, including but not limited to product demand, pricing, market acceptance, changing economic conditions, product technology development, the effect of the company’s accounting policies, and other risk factors detailed in the company’s SEC filings. The company does not undertake to update forward-looking statements. In this conference call, management will be referring to certain non-GAAP financial measures which are provided to enhance the user’s overall understanding of the company’s financial performance. By excluding certain non-cash charges, non-GAAP results provide information that is useful in assessment Radcom’s core operating performance and in evaluating and comparing our 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 quarter’s earnings release. Now I’d like to turn the call over to David. Go ahead, please.

Thank you, Noga, and thank you all for joining us today. The third quarter was a period of continued strategic focus and momentum for Radcom. Our sales were up 57% year-over-year and we cut our net loss by 37%. We had positive cash flow and a book-to-bill ratio over 1. For the first nine months, our sales are up by 39% and we cut our net loss by 73%. This year-over-year growth confirms that we have been making steady progress over the past four quarters. This reflects the strong growth in our markets, our solid win rate, our customer satisfaction, and a steady increase in return business. This is a blueprint for long-term growth and success and we expect it to continue building our company throughout 2014 and beyond. At the same time, the fact that our projects are larger and larger makes it harder to project the timing of revenue recognition. When a project is due to be completed towards the end of a quarter, a shift of just a few days can make or break a quarter. This happened to us in the third quarter. We expected to recognize about $800,000 during the quarter that would have given up $5.6 million in revenues for Q3, which was in line with our internal target. Instead, the $800,000 was shifted into Q4. This is part of the visibility that forms a solid basis for a strong fourth quarter. So looking at one quarter doesn’t give you a full picture. Looking at the year as a whole, you can see that sales are up, expenses are down, the market is full of opportunities, our win rate is high, and our customers are satisfied. This is a formula for continued growth and success, so we remain optimistic about the future. During the quarter, we moved forward with our plan to add new types of revenue streams to our business. We formed a new strategic partnership with Sandvine who will use our technology in their network policy products to add mobility awareness. They needed a SON – self-optimized network – solution for this, and they recognized that our technology was the best available. (Indiscernible) have the potential to bring us indirect sales in addition to our direct sales. On the product development front, we are developing products for the emerging NFV, or network function volatilization environment. In NFV system, security, load balancing, routing and other functions are being moved from appliance into software to make the system more flexible, scalable, and open. This is an exciting new frontier and we intend to lead the market in NFV service assurance solutions. With the higher software component, these products will have higher gross margins which will obviously benefit our entire business. In addition, they will simplify the installation process which will make them even more attractive to our customers. I’d like to finish up with a few general observations about our markets. We are seeing a number of giant companies like IBM, HP, Oracle and Cisco increase their footprint in the telecom segment, including in our niche, service assurance. They are doing this both through M&A and through partnerships. This is a solid confirmation of our market segment (indiscernible) the strong market need for service assurance solutions. In fact, we are seeing very strong interest in our product. Operators need a way to (indiscernible) their customer and to optimize their network resources. This is what our products do, and that is why we are seeing lots of opportunities, including many very large ones from top-tier operators. This is the source of our continued growth and momentum, as you can see from our year-over-year progress; therefore, we have visibility that provides a strong basis for Q4 and are optimistic about the future. I’d like to stop here and turn the call over to Gilad, who will discuss the financial results. Gilad, please.

Thank you, David, and hello everyone. Since you have the press release before you, I will just go over the highlights. Revenues for the quarter were $4.8 million, up 57% compared with Q3 of 2012. This is down 13% compared with the second quarter due to the timing of recognition of $800,000 in revenues. If we had been able to recognize the revenues by the end of Q3 as projected, our revenues would have been $5.6 million, which is up from the second quarter and in line with our internal budget. Instead, the $800,000 will contribute to our revenues for the fourth quarter. For the nine month period, sales are up 39% year-over-year. Gross margin for the quarter was 50% compared with 57% in the third quarter of last year. This is extremely low for us. Our long-term target is 70% and we were at 67% last quarter. Unfortunately, the margin was impacted by the recognition of the low margin project that had been sitting in the backlog for a long time. We expect the margin to go back to normal levels in the future quarters and to continue to rise as we increase the proportion of software in our products. For the nine month period, gross margin was 62% compared with 59% last year. Our operating expenses remained stable during the third quarter. We are finished with our reorganization. We believe that the current level of expenses can support our current business as well as our growth needs. With lower revenues and margins than we expected, we reported an operating and net loss. This was a disappointment after we returned to profitability in the second quarter. Nevertheless, even at this level of revenues and margins, we cut our net loss by 37% compared with last year. Non-GAAP net loss for the quarter totaled $1,017,000 or $0.13 per share, and for the nine-month period it was $1,100,000 or $0.16 per share. At our current level of expenses and normal gross margin, our breakeven point is about 5 to $5.2 million per quarter. Turning to the balance sheet, all parameters are in line with our expectations and we improved our cash position during the quarter. We reduced our inventory by about $1 million, reflecting the recognition of deals from the backlog. In general, the inventory fluctuates from quarter to quarter. Back to you, David.

Thank you, Gilad. So that’s it for the third quarter. We continue to make progress and we have a solid basis for a strong fourth quarter in line with the trend that has been building through 2013. Thank you for your support, and we look forward to reporting our progress in the quarters ahead. With that, we would be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. [Operator instructions] The first question is from Abba Horowitz of Old School Fund. Please go ahead. Abba Horowitz – Old School Fund: Hi, good afternoon. I was wondering if you could tell me, the $800,000 that was pushed off to the next quarter, what kind of gross margin would that have had?

The $800,000 that was delayed had our standard gross margin, so it would have improved the gross margin. It’s in line with our normal gross margin and not with the low margin deal. Abba Horowitz – Old School Fund: So what would your normal gross margin be?

Our normal gross margins are between 65 to 70%. Abba Horowitz – Old School Fund: Sixty-five to 70 – okay. Now, on the last call, did you know that you were going to have this legacy drag on your business? How did that happen? It sounds like it was a bit of a surprise for you. What happened with that legacy business that dragged down your gross margins?

Basically it’s not something that we anticipated in the previous quarter. Our recognition is very much affected by the time that we get acceptance, and therefore it’s quite difficult to forecast ahead what exactly are the deals that we will recognize and what are the deals that we will not recognize within a certain quarter. Therefore, it’s hard to project what would be the margin and what are the deals that would be included for next quarter. In principle, this deal is something from the past. It had been sitting in our backlog for some time with a relatively low margin. It was recognized this quarter. We were uncertain three months ago whether it would be this quarter or the next one, and this is why it affected this one. But it does not demonstrate any slow down in the business or a worsening of our results; it’s just a one-time deal in principal. Abba Horowitz – Old School Fund: Okay, but how big was that in terms of the sale, because if your normal gross margin is 65 to 70% and your gross margin now is 50, it must have been a large part of that sale number in the quarter for it to drag down the gross margin so much.

Correct, yes. It was a substantial deal. It was about 30% of the revenues for this quarter. Abba Horowitz – Old School Fund: Okay, and are you going to have anything like that in the next quarter in Q4, or should Q4 be more—I know you said on the call, but should I be assuming 65, 70% gross margins for Q4?

Yes, we do not expect to have the same situation in Q4, so we are expecting to be in the normal gross margin range. Abba Horowitz – Old School Fund: Okay. Is there any element of your business that’s recurring?

Yes, yes. We have revenues from maintenance from existing customers, which makes up about between 10 to 15% of our business. Abba Horowitz – Old School Fund: Okay.

And I would like to add also the fact that we see growth in the data, especially in the cellular market. That means that our customers need more capacity to handle, so they need to expand their existing install base that the have, so they are buying more licenses. We focus more percentage in repeat business in our future deals. Abba Horowitz – Old School Fund: Okay, and this quarter, was there any repeat business that you saw in this past quarter?

Yes, yes. Abba Horowitz – Old School Fund: How much of that was repeat, of the total number of the $4.8 million? Thirty percent, I guess, was legacy, and 10 to 15% is maintenance, so of that 50% that’s left over, how much of that would you say was repeat business?

I think most of the 50%. Abba Horowitz – Old School Fund: Okay, okay. And just a final question. Backlog – do you have a number for backlog that gives you a certain element of visibility for Q4, outside of the $800,000 that was shifted and I guess a few other things? You announced a deal just recently for $1 million, but is there any other backlog you can give us a sense of what—that gives you that visibility, and what is that size of backlog, if I can ask?

So we do not report our backlog on a quarterly basis. The reason for that is since we have—it’s composed of large deals. It may fluctuate from quarter to quarter. We do give it on an annual basis. We have provided our backlog figure on the fourth quarter of 2012, and at that time it was $20 million. Abba Horowitz – Old School Fund: Okay.

We do expect to provide again the figure at the end of next quarter. We will report it again at that time. Abba Horowitz – Old School Fund: Okay, fair enough.

But I can say that we have a strong backlog which gives us good visibility for the coming quarters. Abba Horowitz – Old School Fund: Okay. Is there any way to smooth out this lumpiness? As you get bigger and grow, will you have some ability to smooth out this lumpiness that you’re seeing?

There are two elements for that. The first one, what you mentioned – I mean, the sales are bigger and bigger, then the lumpiness is slower and we less depend on a specific deal or a specific acceptance test that we are getting from customers. That’s one thing. The other thing is I mentioned improvement in our technology moving more towards software than hardware. This means that the installation time is shorter and the period to get acceptance tests become also shorter. It means that we will be able to control much better the finalization of the project and therefore our ability to focus and to manage the revenues. Abba Horowitz – Old School Fund: Okay. When will we see that? In other words, when is that shift from hardware to software going to be complete?

It’s a progress that already started. The deal that Gilad mentioned, the legacy deal is from Q4 of 2010, so basically what we are doing is we are cleaning the backlog with new deals that are more based on software, which will improve their margins and shorten the time of the project. Abba Horowitz – Old School Fund: So of that $20 million backlog, I guess we’d take out the 1.2, $1.3 million of this legacy. How much of that would you say is in that higher category, higher margin business that would hit the 65, 70% of that $20 million?

I don’t have the exact calculation, but I can share that in the last two quarters, the deals were with much more margin than in the past. Abba Horowitz – Old School Fund: Okay, beautiful.

But basically almost all of it is—not all, but almost all of it is at the normal margin rate. Abba Horowitz – Old School Fund: Okay, excellent. Thank you.

If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. The next question is from Jed Meyers of Alabaster Capital. Please go ahead. Jed Meyers – Alabaster Capital: Hi guys. A couple quick questions. You have $800,000 that’s deferred into the fourth quarter and you typically have a budget flush from customers, so can you give us some sense about where you think 4Q revenue could be coming out?

So we do not provide guidance for future quarters mainly based on the fluctuations. As you can see, it’s very difficult for us to forecast from one quarter to the other. The $800,000 has shifted into Q4, so this does provide a certain basis. What you need to take into consideration, you talked about customer budgets. You need to take into consideration is that there is a time gap from the time that we receive a purchase order until we recognize it, so there is no seasonality in our recognition that is parallel to the recognition. Jed Meyers – Alabaster Capital: Okay. I know you don’t comment on what the backlog currently is, but would you expect that backlog will be up – there’s only two months left in the year – that when you on December 31 give a backlog number, the backlog will be up healthily from last year?

We are working on increasing sales and bringing more business to Radcom. As we mentioned in the call, we see a lot of potential, a lot of new deals from Q1, et cetera, so basically our target is always to improve the numbers. We are not sharing the forecast for revenue as well as backlog. Jed Meyers – Alabaster Capital: Okay, and just last question – will you be able to keep OPEX at these levels over the next several quarters, or do you think OPEX needs to start going up again?

We expect it to remain at the same levels. We believe we can support a higher range of revenues with the existing operating expenses. Again, there might be small fluctuations but basically we are expecting to remain at this level of OPEX. Jed Meyers – Alabaster Capital: How much could you increase revenue at this level of OPEX?

I believe we can support anywhere between 7, $7.5 million a quarter. Jed Meyers – Alabaster Capital: That would be great. Thank you.

There are no further questions at this time. Mr. Ripstein, would you like to make your concluding statement?

Thank you Noga, thank you Gilad, and to you all for your participation in this conference call.

Thank you. This concludes the Radcom Ltd. Third Quarter 2013 Results conference call. Thank you for your participation. You may go ahead and disconnect.