Yaron Ravkaie - CEO Ran Vered - CFO

Dmitry Netis - William Blair Marcel Herbst - Herbst Capital Management Keith Resnick - JP Morgan Alex Henderson - Needham and Company

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Fourth Quarter and Full Year 2016 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. [Operator Instructions]. As a reminder, this conference is being recorded, February 14, 2017. On the call today is Yaron Ravkaie, RADCOM's CEO and Ran Vered, RADCOM's CFO. By now, we assume you have seen the earnings press release, which was issued earlier today. It is available on all the major financial news feeds. Please note that the management has prepared a presentation for your reference that will be used during the call. If you have not downloaded it yet, you may do so through a link on the Investors section of RADCOM's website at www.radcom.com/investor-relations. If you have any trouble, please send Mark Rolston an e-mail at markr@radcom.com and he will send it to you right away. 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. The company does not undertake to update forward-looking statements. The full Safe Harbor provisions are set forth in the presentation. 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 assessing 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. I would like to repeat the information about the presentation. If you have not downloaded it yet, you may do so through a link on the Investor section of RADCOM's website at www.radcom.com/investor-relations. If you have any trouble, send Mark an e-mail at markr@radcom.com and he will send it to you directly. Now, I would like to hand the call over to Yaron. Please go ahead.

Okay, thank you, operator, and thank you all for joining us today. I hope you have our presentation in front of you and I'm going to begin with Slide 6. We're very pleased with our fourth quarter results which mark a strong end to the year for RADCOM. For the full-year 2016 we delivered revenue growth of 58% and increased non-GAAP EPS over six times highlighting our ability to profitably grow the business while investing for future growth. During the fourth quarter, we continue to focus on executing our current contracts, expanding the scope of work with existing customers, and moving forward with our new customer engagements. Throughout 2016, we continue to benefit from AT&T using our innovative MaveriQ product suite as the service assurance component of their new NFV network. As a reminder, AT&T is very aggressive and advance in incentive fee program and plan to virtualize approximately 75% of its network by 2020. On their most recent earnings call, AT&T stated its virtualization plan is ahead of schedule with 34% of their network are being virtualized at the end of 2016. As a result, we expect AT&T to remain an important customer and key reference with the company as we continue to play a major part of their network virtualization strategy over the coming years. The NFV market is developing at a record rate as the world's top tier carriers emulated the virtualization development of the AT&T. The market feedback we are receiving that they don't want to spend valuable CapEx and OpEx on hardware based solutions. Consequently these carriers continue to be very interested in our MaveriQ platform as they recognize RADCOM's proven leadership in the market enabling the path to NFV and future proofing their purchasing decision. As a result, we continue to feel strongly that our hybrid strategy of running a virtual NFV service assurance solution in a hybrid world of both physical and virtualized network element is the right one. Our engagements with leading top tier carriers above their respective NFV strategies has only accelerated since AT&Ts public endorsement of our innovative virtualized solution in August 2016. We remain actively engaged with nine major carriers under NFV strategies and with four of them we're executing network proof of content deployment. Besides these nine carriers during this quarter, we've been engaging with additional carriers and are receiving strong and positive feedback on our highly advanced virtual solution. We also continue to focus on our existing business, during the fourth quarter, we successfully finished a complex MaveriQ software deployment in a top tier Latin American customer. Throughout 2016 we saw limited amount of NFV related purchasing activity from carriers outside of AT&T. We believe this has created a pent-up demand as they took time to evaluate how to move forward with their NFV strategies. At the same time, we saw their spending for hardware equipments being reduced to a bare minimum. As a result, we expect some of this pent-up demand to be released in 2017, as carriers start their transition to NFV. We anticipated to have a positive impact on the entire NFV industry and lead to increasing demand of our leading MaveriQ solution used to assure customer experience during the critical NFV transformation. Recently, we saw public announcement of AT&Ts ECOMP being related into open source. As a reminder, ECOMP is essentially an automation layer used to facilitate the onboarding, operation, and scaling of virtual network functions under network. Since AT&T announced their intent to open source ECOMP we've already seen other carriers announce that they would be evaluating this platform which we expect will lead to additional evaluation and accelerate the adoption by top tier carriers. With RADCOM being the key component of the broader ECOMP platform, we believe that we are in position to benefit from this trend. In November 2016, we also announced that we joined open source model OSM, which is an anti-compliant operator in web community focused on delivering an open source management or an end orchestration MANO during Mobile World Congress 2017 that's going to be held at the end of the month, we will be demonstrating our MaveriQ solution running an open source model. By working both with ECOMP and OSM we cover significant part of the NFV open source activities to-date. To assure the company is ready for additional projects, we have continued to invest in engineering resources. Specifically, we finished 2016 with an increase of approximately 50% in our workforce. Currently we have almost 200 employees worldwide giving us a strong foundation to assure we deliver on our commitment and scale the number of projects we can execute. We believe this is the right approach to meet market demand for our solution despite the near-term impact on profitability over the next several quarters. We also added to our senior management team, with the addition of our newly appointed, Chief Technology Officer, and Head of Product, Rami Amit, who was previously Director of Engineering at Cisco NFV Business Unit. He is one of the most knowledgeable people in exam IP technologies and given his telecom market knowledge, technological and thought leadership coupled with proven ability to lead large scale top-tier CSP deployments, I'm confident that he will bring immediate value to the company. Looking forward, the focus for the first half of 2017 is to optimize our productivity following the increase in the workforce and we will continue to evaluate our needs throughout the year. So, in summary, we are very pleased with our progress and continue to focus on execution. Looking forward, we remain excited by our prospects given RADCOM's strong position in the industry. With that, I will stop and turn the call over to Ran Vered, our CFO, to discuss the financial results. So Ran, please?

Thank you, Yaron. Since you have the financial results, I will just go over the highlights in Slide 6. To help you understand the results, I will be referring mainly to non-GAAP numbers which exclude share-based compensation, inventory write-off, and non-cash importation taxes write-off. Revenue for the quarter was $8 million, up 196% year-over-year. Our gross margin for the quarter was 71% on a non-GAAP basis in line with our expectation. As a reminder, we expect gross margin to continue to fluctuate depending upon the mix of each quarter's revenue. On the long-term basis, we expect the gross margin to be at higher level as more carriers will contract with us based on the NFV software license model. Our gross R&D for the quarter on non-GAAP basis increased to $2.4 million from $1.5 million last year which was in line with our ramp up plan and highlights our strategy of investment to support future growth. In addition, we will receive $552,000 from the Israel Innovation Authority during the period reducing the net R&D for the quarter to $1.8 million. As most of our R&D ramp up was done in Q4, we expect the gross R&D expenses net total to be roughly at the same level. Sales and marketing expenses for the quarter increased to $2.8 million on a non-GAAP basis, up from $2 million in the fourth quarter of 2015 due to headcount increase within Q4. G&A expenses for the quarter on a non-GAAP basis totaled $632,000 compared to $458,000 in the fourth quarter of 2015. Operating income on a non-GAAP basis for the quarter was $381,000 compared with loss of $1,664,000 for the first quarter of 2015. Net income for the quarter on a non-GAAP basis was $422,000 or $0.04 per diluted share. The result included $552,000 or $0.05 per diluted share benefit related to the grants on the Israel Innovation Authority. During Q4 of 2015, grants from the Israel Innovation Authority were approximately $576,000 or $0.07 per diluted share. On a GAAP basis, as you can see in Slide 5, we reported a net loss for the quarter of $737,000 or $0.06 per diluted share compared to loss of $2,124,000 or $0.25 per diluted share during the first quarter of 2015. I will now quickly highlight our results for the full-year of 2016. Total revenue was $29.5 million, an increase of 58% compared to the full-year 2015 and at the high-end of our guidance range. During the year, AT&T accounted for approximately 62% of our total revenue. During the full-year 2016, non-GAAP basis gross margin was 75%, non-GAAP operating income was $4 million, and non-GAAP EPS was $0.44 for the year based on 10.8 million diluted shares. Turning to balance sheet, as you can see on Slide 9, our cash and cash equivalents as of the end of the quarter were $42.9 million approximately five times to the level at December 31, 2015. We believe that our strong cash balance places the company on first footing for addressing the big Tier 1 opportunities. Now turning to guidance. We enter the year with good momentum and believe that we are in position to increase market share and expand our technology leadership as we continue to invest in R&D and expand our presence in key markets. As a result, we believe, we can achieve fiscal 2017 revenues in the range of $36 million to $39 million. We view this as a very strong starting point for the year given the high growth rate delivered in 2016. This guidance also assumes ongoing traction with AT&T as well as some other existing Tier 1 customers and potential new customers. We are hoping to build into our revenue guidance and we expect growth to be higher in the second half of 2017, as we closed on the opportunities in the pipeline. In addition, while we don't tend to provide quarterly guidance, we wanted to put out that we expect first quarter 2017 revenues to be slightly below or similar to the first quarter 2016 due to seasonality. In terms of profitability, while we are not providing specific EPS guidance what's important for the company now is to have the infrastructure to execute several projects in parallel, so we can capture the structure that is happening with NFV. Similar to revenue, we expect our profitability in the second half of 2017 to be better than the first half of the year as a result of the revenue growth in the second half. We also expect profitability for the first quarter of 2017 to be below the first quarter of 2016 due to the continuation of our OpEx run rate in addition to the timing of anticipated grant on the Israel Innovation Authority. As a reminder, we view and continue to manage our business on an annual basis because our quarter results can fluctuate due to the timing of implementation milestones. With that, let me turn back to Yaron.

Thank you, Ran, and in summary we are very pleased with our significant progress during 2016 and are well positioned to maintain the momentum in 2017 and beyond given the level of activity we see from Top Tier carriers globally. And with that operator, if you can manage the Q&A please.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. The first question is from Dmitry Netis of William Blair. Please go ahead.

Nice results, thank you gentlemen. Couple of questions. On AT&T for 2017, can you guys give us a sense of what the expectation is, 2016 was $18 million and are you expecting it to be somewhere in that range higher any color on what AT&Ts sort of what numbers baked in into that guidance would be helpful?

Hi Dmitry, it's Yaron, how are you? So we're saying two things one is that in 2018, we expect AT&T to be around 50% of our revenue 50. And I would say that the lower watermark should be the same run rate as we've this year given that there is some opportunities in the pipeline with AT&T it might be higher.

Thank you. So --

So we model into the guidance but we might see a growth on top of that.

Okay. So we are looking at give or take $18.5 million may be $19 million given sort of mid-point of your guide?

Something like that, yes.

Okay, great. And then, so if we do assume that number, let's say we assume $18.5 million for AT&T in 2017, if I take the guidance at mid-point you're baking in about call it $19 million, $19.5 million from non -- call it non-AT&T customers and that's up from if I do my math correctly, it's up from $11 million non-AT&T business you had at 2016. So you're going from $11 million to $19 million, $19.5 million. What I want to try and get to how is much of that new revenue in 2017 is new NFV deals versus existing customers?

We're expecting that the new NFV deals will materialize at the second part of the year, so its $7 million. I don't think we can give an accurate number now. But that's basically what we are expecting.

Okay, so it's more backend loaded is what you're hoping for the new NFV opportunities here. Got it.

Yes, and we mentioned previously that we expect these deals to happen in the second half of the year and once you book them until you can recognize revenue also takes a bit of time.

Okay, okay. So in that then, Yaron, can you comment on the existing business just curious if you could walk through some of the opportunities may be you had some business in Latin America, there is some business in Asia, how you're feeling about that customer base are they spending more with you going into 2017 as it's reflected in the guidance. So I'm just curious to see where the confidence is coming from the existing base of customers?

Okay. So some of it is already business which we have booked in 2016, so we have visibility. I would say that the overall existing business or starting points for 2017 is healthier than we have in 2016. The company was able to focus in 2016 both on AT&T and on the other existing customers. And starting the trials that we did, I mentioned, nine and the four. And may be last the fact that we put a figure in the investment in 2016 and we released several MaveriQ releases that were implemented in AT&T but they were also implemented in some of our existing customers. The customers saw a very good benefit from it, so that they're going to be ready which basically is giving them the appetite to not to increase the spend with us. So again the starting point for 2017 was on the existing is significantly better than in 2016.

Okay, all right. That's helpful. So the bookings basically will depend are up the same point last year with the existing customer base. Any color -- can you provide any color on the bookings in terms of what percentage of revenue it represents at this point in time or whether I would assume the book-to-bill is higher than the 1, but I don't want to put words in your mouth, any color on the bookings business?

Well we won't disclose the accurate number but we have good visibility. I would say its good visibility that we've in the beginning of last year into the numbers and we feel -- we started the year, we feel good with that guidance that we're providing. So and I think you saw execution last year, we're going to try to do the same.

Okay, thank you. May be one more question for Ran on the guide just kind of two things, I guess bottom-line is where I wanted to hit on quickly. You ended the year with 13.5% operating margin 2016 obviously there is a lot of spending that's happening, you said profitability will step up in the second half versus first half and you have the seasonal March quarter to get out of the way, so that would imply you'll have I guess lower operating margin in the first half but I guess what I'm getting to is what is the margin for the year is it supposedly down what the Street's projecting, I think the Street is somewhere in the 8% kind of operating margin range may be 10% are you comfortable with that number you're going to be better or worse than that, just any color on that Ran would be helpful, thanks.

Thanks, Dmitry, hi. So actually we are okay with the Street's forecast because we know that in the first half our visibility will be lower because of the OpEx run rate and the impact of the investments that we've done. Now in the model, our internal model practically in the range of the gross margins or on the operating margins that you indicated.

Okay. And then gross margin you feel comfortable with where gross margins are, you're not expecting any sort of step-up or step-down in gross margin here, I mean you're staying in that 71% range?

Yes.

Okay. And then lastly on the revenue outside Q1 will revenues step up sequentially to get to your guidance for the year or you expecting anything else along the way, I'd imagine not, given the guidance but I just want to confirm that?

Can you repeat the question, Dmitry?

You said Q1 will be seasonally lower than Q4 or may be flat with Q4 but other than that do you expect sequential growth in June, September, and December quarters?

Yes.

Okay, okay. Just confirming that. Thank you very much. I will cede the floor.

Thanks.

Thank you. The next question is from Marcel Herbst from Herbst Capital Management. Please go ahead.

Good morning and thanks for taking my questions. Middle of last year, you announced that you're launching major new product area adjacent to the core MaveriQ, the Probe line although for competitive reason at the time you couldn't give more detail on that. Can you talk about this little bit more now maybe in terms of what problem you're solving and how far long you're in trials with this?

I still can't disclose anything from -- because of only competitive reasons we're keeping it confidential and we're introducing it to basically customers on a one-by-one basis based on non-disclosures and things like that. So I apologize myself but I won't be able to give more color on it.

Absolutely fair enough. But speaking on for competitive landscape you -- in the past when you spoke about it, you had a very large technological lead and I was wondering if you can just update us on what you're seeing at the moment on the technology front with the competition and how much the competition has gone up or not? What's going at the moment in that landscape?

Okay. So I mentioned in my script earlier that when gauged with the clients, we're doing trials and I also mentioned that we've also expanded our coverage and we started to meet and do deep dives with additional carriers. So what I'm telling you is primarily based on the feedback that we're getting from the carriers themselves that they are reiterating very strong feedbacks on our advanced solutions. So that gives me the comfort level that we were maintaining the gap and the compares are not closing the gaps. So the feedback we're getting is we have unique things, we are very advanced; we exceeded the experience that they were gaining from AT&T. On the other side of the equation, I do see the competitors all putting their websites similar things that we have, starting to post solutions for NFV and doing marketing activities. I take it as a very positive sign because they are starting to see it as a market as I mentioned that there is going to be demand for that, so they are starting to align to that. I believe that we can maintain a significant competitive advantage primarily because AT&T is doing this huge transformation that it will take time for other carriers to do it and the experience that we continue the releases that we're giving them and the R&D that we're spending is no second to none from the experiences we're gaining. So gives me other comfort level that I need to assure that we make them lead volume.

Okay, great. Thanks great job.

Thanks Marcel.

The next question is from Keith Resnick. Please go ahead.

Hey guys, congratulations on a continuing progress in the top-line. My question is related to the new hires that you have. I think it will be kind of interesting to hear how you got the Director of Engineering of NFV, Engineering at Cisco to come to -- with the [indiscernible] can you get us little Radcom or the guy, the salesmen at IBM, can you may be enlighten us a little bit on how you got to reach those guys?

Very charismatic feel. Here is how I'm going to answer it. Going to give you some interesting perspective little bit. The way I see it and this is through many discussions with the key things including AT&T. The fact that we're virtualizing the network and they're rolling out things like e-com, and I mentioned the OXN this type of automation activities and they're working with companies that are but it gives me the -- a poach to say that this is an era, the financial years of the era for companies that are very focused and I'm talking about companies that work with carriers that are very focused on software, very focused on virtualization, and it gives a playing field may be even with an advantage to companies of our size. I think the 200 employees let's say to 300, 400 employees may be even to some extent less the 200 that's the range allows us to be very, very fast and this allows the customers at AT&T to feel that agility in what they are getting, okay. We released over the course of the year around the above 10 releases to AT&T almost once a month, this is of course became available to all of our customers which I alluded before. This is a huge advantage. Now on the other side of equation are big companies like Cisco, like others that will have hard time to deal and provide that type of agility, provide disruptive promotion model, provide disruptive technology to this world now that is becoming virtual and it's becoming much faster and this also is creating the migration of talent to us. I can tell you that the increase you see the announcement on rounding the CTO with five [indiscernible]. But we have added many, many, many strong engineers during the course of the year and we're attracting those engineers today because of what we see our ability to produce better cutting edge et cetera.

The next question is from Alex Henderson of Needham and Company. Please go ahead.

Hi guys got a couple of questions for you if I could. First off, in your guide are you anticipating that to be building backlog against that 2017 number?

I'm not sure I understood.

So where is your book-to-bill for 2017 in your forecast, are you anticipating your backlog will go up, so your book-to-bill would be over one for the year as we go forward?

We will not go into -- we are not giving a specific number but we anticipate it to generate the growth that we need in 2018 and we're anticipating more growth in 2018, so the answer is yes.

And the second question, can you give us some sense of what your NRE is going to look like for the year in 2017 and specifically do you expect any NRE in the R&D line in 1Q?

Yes. So we're virtually expecting the same funds from the Israel Innovation Authority roughly the same of may be little bit higher than the ones we have in 2016, most roughly the same level.

And how about in 1Q usually you kind of have a blank in 1Q sometimes?

So you're right and this is why I said earlier that just with the timing of the anticipated grant in Q1 our profitability in Q1 is going to be challenging because of the timing of getting these grants in Q1 in the last years we don't get it in Q1.

So if I look at the OpEx in Q1, it sounds like you're talking about something around $5.5 million, $6 million for the quarter, is that kind of in the ballpark?

In terms of OpEx?

Just for OpEx yes.

Yes, yes. It's roughly in the vintage that you mentioned.

All right.

We will not provide the specific numbers but yes it's in the range.

All right. Couple of other sort of housekeeping things. Can you give us any sense of whether you plan on having some taxes in 2017 or not and or is that still bouncing around sub-100,000 per quarter?

Yes, this is still on the low range of several high of several hundred a quarter -- several thousand sorry.

Right. And how about on the share count, do you have any sense of what kind of build we should be anticipating there?

Can you repeat the question, Alex?

Yes. share count is it pop up a little bit in the first quarter on grants and then slight increases over the course of the year is that the trajectory?

The people have shared and the usage direct to material to stocks. So it won't be something significant, a modest increase.

Okay. And how about on the headcount for the year, do you -- are you anticipating another 50 to 100 over the course of the year or is it you could absorb what you've just done, how should we think about that trajectory?

So hi, this is Yaron. Basically we don't anticipate something major in the first half of the year as we absorb everything. We would have some growth primarily in North America as we will have some resources there. And we can't really predict our needs at this stage to the second half of the year because some of the prospects that we're working might require additional resources something like transformational comes in then we'll go and need to relook at it. So what we said is that we'll have pointed the middle of the year where we evaluate on these and then we will take it from there.

Okay. And couple of operational questions relative to your partnering, can you talk a little bit about what's going on with Amdocs at this point obviously you guys have a very tight relationship there. They have had a number of wins, it seems like that's building a nice head of steam as a partnership?

In fact we recall correctly the -- so first of all we've I'd say good partnership with Amdocs. Amdocs so let's start from the beginning. Amdocs participated with AT&T on the ECOMP program and ECOMP is comprised of eight different modules, three of them Amdocs participating and they have a good relationship with AT&T. As ECOMP gets adopted by additional carriers, we already saw a public announcement that Orange, Poland is adopting -- is trying out or doing something with ECOMP and we also saw something from Amdocs related to that. Our expectation the way we read the market is and I think Amdocs alluded it also to in their earnings is that now that ECOMP is actually really open to -- so I think what's happened is carriers were basically waiting for that they saw that the AT&T plans to put it in open source but they're waiting to see if it actually will happen. As it actually happens just recently now we see more accelerated activities some parties, some based on our knowledge that carriers are seriously looking in it starting do trials, following AT&T and we expect Amdocs to become a system integrator for some of these activities. As Amdocs becomes the system integrator, we might be able to generate a joint business on that. And we're not giving [ph] it to Amdocs, we can also generate by ourselves, we can generate with other partners. I expect also by the way to become to -- as the year progresses that you will see additional system integrator or network companies that operates not only in the network space to also becoming involved in ECOMP. You saw already some announcement from Ericsson and I expect more to come and I think you guys would follow it, and I'll of course give color wherever I can. All of this should translate to a good headwind -- good back win for us to propel us forward so we were anticipating that.

If we look at the active trials that you've got the nine that you've identified four and pops, do we expect that as we go forward that will hold steady at that capacity on your ability to deliver on that or now that you've added another 50 employees can we see that moving up into double-digits or some other numbers over time, how would you characterize the trajectory of that number?

It's a very good question. I alluded in the script that we're already engaged with additional carriers behind the nine. So the natural thing that will happen is that, this is going to impact the nine numbers can grow and the trials can grow it's yet to be seen, right, so it needs to happen. But I'm assuming that what will happen is that the -- some of these like the full trial, some of them would finish; the plans will get decision, but generally during the year some of the general trial. So we're not going to close shop and just stay with four and nine. So this is going to continue to be active. I'm very happy with the progress that we're making overall. I'm getting very good feedback from the industry, from these trials, from the ones that are like pre-trial and from any new one that we're engaging and Mobile World Congress is coming up and we're going to be very busy there, so.

Just to be clear or any of these trials seen any additional new competitor become involved or are they at this point fairly exclusive to you?

No, nothing changed from that opportunity. We work very intimately with these carriers. Some of them have already tried other technologies and they started it, they're not mature enough and they are progressing with that, so again optimistic view here.

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

I want to thank everyone for hearing us on this call. We have very interesting year ahead of us. All of us are going back now to work and execute and make our customers happy. So thank you very much.

Thank you. This concludes the RADCOM Limited fourth quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.