Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Results Conference Call for the Third Quarter of 2020. All participants are present in a 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 and will be available for replay on the Company's website at www.radcom.com later today. On the call are Eyal Harari, RADCOM's CEO; and Amir Hai, RADCOM's CFO. Please note that management has prepared a presentation for your reference that will be used during the call.

If you have not downloaded yet, you may do so through the link on the Investors section of RADCOM's website at www.radcom.com/investor/relations. Before we begin, I would like to review the Safe Harbor provision.

Forward-looking statements in the conference call involve several risks and uncertainties, including but not limited to the Company's statements about its continued investment in technology and R&D, the expected transition to, and roll out of 5G networks and other market trends, the Company's market position, cash position, expected gross margins and potential growth.

The Company's expectations with respect to its contract with Rakuten and continued relationship with AT&T. The potential of RADCOM’s each product, the Company's expectations regarding the impact of COVID-19, and its revenue guidance. The Company does not undertake to update forward-looking statements.

The full Safe Harbor provisions, including risks that could cause actual results to differ from these forward-looking statements are outlined in the presentation 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 stock-based compensation expenses, non-GAAP results provide information that is useful in assessing RADCOM's core operating performance and in evaluating and comparing results of operations consistently from period-to-period.

The presentation of this additional information is not meant to be considered as 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, which is available on our website. I would like to repeat the information about the presentation.

If you have not downloaded yet, you may do so through the link on the Investors section of RADCOM's website at www.radcom.com/investor/relations. Now, I'd like to turn over the call to Eyal. Please go ahead..

Thank you operator, and thank you all for joining us today. Earlier this morning we issued a press release, stating our third quarter results for 2020. We are pleased with the results as we continue to execute against our full-year growth plans in the third quarter, which was highlighted by increased revenue and an improved bottom-line.

As you may have seen total revenue for the third quarter of 2020 were $9.8 million. Based on our solid visibility and focused execution, we expect 2020 to be a growth year and reiterate our full year 2020 revenue guidance of $35 million to $38 million.

We continue to strengthen our position as the leading 5G assurance provider in the third quarter, while meeting our financial goals. We believe, the R&D investment we made and continue to make over the last few years and our current customer engagements will continue RADCOM's growth in the years to come.

Last week, we announced the 5G assurance contract win that is one of the industry's first standalone 5G assurance contracts. This is an addition a multi-year agreement with Rakuten Mobile to assure their 5G network with our 5G assurance and analytics solution RADCOM ACE, launched in August.

Rakuten has selected our solution for its non-standalone 5G service launched in September, and its standalone 5G service launch expected to occur in 2021. Our automated cloud-native assurance solution will be critical component of the Rakuten communication platform.

Our solution will help Rakuten identify service issues in real time and troubleshoot them, which is essential for smoothly invigorating Rakuten's customers to the new 5G network and onboarding new customers. These selections represent a significant milestone along our 5G journey.

It is also an acknowledgement of RADCOM leaderships as a 5G assurance vendor, and it's the result of our focus investment in R&D and product innovation. Additionally, we continue to support Rakuten's existing 4G network needs to deliver top quality services to their customers.

At the end of September, just 6 months after its full scale commercial launch of the world's first fully virtualized mobile 4G network, Rakuten launched its 5G mobile service. We're excited to continue our partnership as Rakuten expand its coverage.

In the U.S., we continue to deliver cutting edge software releases for AT&T and provide support for the initial evolution of its cloud network, that back its nationwide 5G rollout.

Last month, Ookla ranked AT&T number one for offering the fastest nationwide 5G network as it continued its emphasis on high quality network to deliver connectivity to businesses and consumers alike.

Our [indiscernible] with world leading customers, such as Rakuten and AT&T provide us with invaluable experience and knowledge that can prove to be vital as operators transition to 5G. Currently we are involved in multiple 5G opportunities and trials at various stages at selected customers.

The expertise we have built along with our continuous technology enhancements positioning us well for the evolving market. The telecom industry has been robust throughout the third quarter as connectivity full cycle following global lockdowns.

Businesses and families continue to rely heavily on high quality network performance for managing day-to-day life, even restriction eased. As a result, our customer's needs were as crucial as ever. We are very proud of our team for how they have continued supporting our customers, despite the challenges of the COVID-19 social distancing restrictions.

While we focus on delivering on our customer commitments, we also ensured our employees, vendors and customers health and safety. With working from home and visual interactions, the new norm, we believe technology trends that they rely on 5G are priority for more and more operators.

5G is expected not only to increase network speed and performance, but it is also likely to unlock new application for telemedicine, remote machinery, virtual reality, and countless other applications.

As you roll out a multi-stage process, which operates as choosing the network equipment provider first, then evaluating 5G assurance solutions as the technology continues to roll out. We consider these 5G contracts with Rakuten Mobile and other current customer engagements and trials is a good sign that the 5G market is evolving.

It supports our view that some operators are already moving beyond the initial step of selecting the network providers to choose assurance vendors. We believe this gradual market shift will spur the opportunities for us, and as we’re well-positioned to capitalize on this with our innovative solution, RADCOM ACE.

Based on the latest 5G market status reports from the GSA, at the beginning of October, they were already over 100 5G networks worldwide. These compares to 60 5G networks at the beginning of 2020. The same 5G report states that overall more than 397 operators are currently investing in 5G.

This includes trials, acquisition of licenses and network planning. So we are encouraged by the industries advancement in 5G. Some operators have been waiting for more 5G devices to be commercially available before launching 5G services. We saw in the third quarter, the number of commercially available devices almost doubling.

In October, Apple has the virtual event under the slogan "Hi, Speed." in which they highlighted the benefit that 5G has to offer. That means that if consumers buy a new iPhone 12, it will be 5G enabled.

[Indiscernible] of mainstream technology adoption, we believed that Apple's entrance into the 5G market sends a strong signal that the 5G revolution is underway and evolving. Expect initially 5G investment and solution evaluations for early adopters to ramp up into 2021.

So far the customer feedback we have received for the RADCOM ACE has been very positive. RADCOM ACE is fully cloud native, designed for the new 5G network architecture and is built in AI and machine learning capabilities to deliver automatic real-time insights for operators to ensure a superior 5G customer experience.

We believe that the RADCOM ACE is the most advanced solution for automated assurance and need to differentiate it by its capabilities, which position us very well to capture market share, as more operators transition to 5G and select that assurance vendor.

With that, I would like to turn the call over to Amir Hai, our CFO, who will discuss the financial results in detail. Amir, please go ahead..

Thank you, Eyal, and good morning, everyone. This quarter, we continue to grow revenue with healthy gross margins and benefits from COVID-19 related lower expenses, which ultimately improved our bottom line. Now please turn to Slide 6 for our financial highlights.

To help you understand the results, I will be referring mainly to non-GAAP numbers, which exclude share-based compensation. We ended the third quarter of 2020 with revenues of $9.8 million, an increase from $9.4 million for the -- in the third quarter of 2019. On a GAAP and non-GAAP basis, our gross margin was 76% in the third quarter of 2020.

We expect full year non-GAAP gross margin to be at the similar level as previous year. Please note that our gross margin can fluctuate depending on the product mix. Our gross R&D expenses for the third quarter of 2020 on a non-GAAP basis, were $4.6 million, a slight increase of $100,000 compared to the third quarter of 2019.

During the quarter, we received grants from the Israel Innovation Authority for $478,000. Sales and marketing expenses for the third quarter of 2020 were $2.3 million on a non-GAAP basis compared to $2.6 million in the third quarter of 2019. The decrease is mainly related to a reduction in travel expenses due to COVID-19.

G&A expenses for the third quarter of 2020 on a non-GAAP basis were $798,000 compared to $812,000 in the third quarter of 2019. Operating income on a non-GAAP basis for the third quarter of 2020 was $239,000 compared to an operating loss of $1.2 million for the third quarter of 2019.

Net income for the third quarter of 2020 on a non-GAAP basis was $246,000 or net income of $0.02 per diluted share, compared to a net loss of $988,000 or a net loss of $0.07 per diluted share for the third quarter of 2019.

On a non-GAAP basis, as you can see on Slide 5, our net loss for the third quarter of 2020 were $442,000 over a net loss of $0.03 per diluted share. This compared to a net loss of $4.7 million or a net loss of $0.12 per diluted share for the third quarter of 2019. At the end of the third quarter of 2020, our headcount was 278.

Turning to the balance sheet. As you can see on Slide 9, our cash, cash equivalents and short-term bank deposits at the end of the third quarter of 2020 was $65 million. We believe that our strong balance sheet provide us with the flexibility to execute the opportunities ahead of us and adapt to the ongoing global uncertainty.

That end our prepared remarks. I will now turn back the call to the operator, for your questions..

Thank you. [Operator Instructions] The first question is from Alex Henderson of Needham and Company. Please go ahead..

First off, congratulations. Very nice quarter pretty much across the board. I wanted to ask a couple of questions. One relative to the COVID situation.

Obviously, there's been a lot of delays at most companies that are dealing with service providers as a result of the inability to fully get into the labs and to meet with the right people and service providers across the globe. However, it does sound like there's been some progress on that.

I was wondering if you'd give us your sense of how challenging it was to execute in that environment and whether that's starting to improve and therefore starting to free up some of the opportunities that are obviously in front of you..

Hey, Alex, good morning. I think that we are now already starting to get used to this new normal, while definitely COVID-19 at some restrictions and travel is very limited. We really adept the company for working [indiscernible].

I think that as a software company focused on virtualized technology, we are well-equipped to do a lot of the activities with customers, definitely conference sessions, video sessions and also drive using a connectivity from remote. It doesn't require everyone in our customer community to adjust to this new environment.

But we see also some benefits as it allow us to have also a bigger reach to more customers because everyone is now in a click of a button. You can have more engagements, more sessions. Yes, they are different. It's not like onsite meetings and in some area there's some difficulties.

But overall, I think we are very proud of the team in the overall execution as you can see and the results is quite positive..

Looking at the pipeline of activity that you've pulled in and be obviously a good success with Rakuten and AT&T.

Is it reasonable to think at this point that you will expect some additional contracts to help drive continued growth in '21? Any thoughts on the shape of the curve there, or conversely is the slowdown from COVID diminishing rate of acceleration..

No. So I think the market and -- we see there are lots of activities with existing and new customers, exploring our new -- newly launched RADCOM ACE, our new cloud native 5G assurance solution. And as I pointed, the message we are getting is very positive.

During the increased number of operators that are starting to invest in 5G, while as I mentioned before, most of them are in the initial stage, but we are very encouraged by the industry moving forward and investing more and more in 5G. The best example I believe is most of you probably saw the Apple event with launching the new iPhone 12.

I think, I mentioned it also a few months ago that many of us use iPhone for connectivity until Apple will support 5G. For many of us, it won't be relevant. Now the iPhone -- the new iPhones are coming and the demand from the customers for 5G will increase. And I believe this would drive forward the operators investment into 5G.

So we are definitely seeing that there are more opportunities that could arise in the next months and COVID-19 is [indiscernible] complexity, but it's not that the market is not moving forward. It definitely move slower then there are a lot of indication of the continued investment in this space..

If I could just delve into Rakuten for a moment.

Obviously, it's a big improvement there, but they've had some issues with their network, have decelerated the rate of deployment because of -- I think it's a little bit of a overly aggressive strategy causing some issues on their deployment or are we now past all of that and there we accelerating things..

So we are now getting to Rakuten configuration and specifics. I think the one thing you cannot say about Rakuten, is that they’re accelerating. Rakuten just launched their 5G network last month. This is only 6 months after the commercial launch of the 4G network. I think this is record speed for any [indiscernible].

They're continue pursuing innovation and we are walking with them on multiple tracks and this contract is a great sign, probably one of the first operators to commit on the 5G standard on assurance, which is the 5G longer term that they are expecting to launch in June, 2021.

So activities are very high with Rakuten and they’re continuing to invest full power and they’re fully committed to the 5G.

And we are really active with them, both on the current 4G agreement and the new 5G implementation that is starting with their network that was just launched on the non-standalone and activities to make sure that they are launching a high-quality network for the standalone mid 2021..

One last question, then I'll cede the floor. The competitive landscape, it's been a while brewing to get to these 5G deployments.

Have any of the competitors managed to step up their game or do you still have the commanding lead that you've had, for the last several years?.

So the overall message we get from our existing customer and new opportunities is, it's great that they appreciate our technology. I think the in-depth of our virtualization expertise is shown and while you are looking on 5G virtualization is a consensus, because no one is implementing using proprietary [indiscernible], any new 5G build.

So while I believe, if before we were working in a -- in the virtualization, this was a niche in the 4G. For 5G, this is the central stage. All 5G networks, or most of them at least are going to be based on virtualization.

And our technology advantage is appreciated by the customer, by the market and we believe that we are very well positioned with the space.

We didn't see any -- anything significant from competitors so far, but I'm sure that competitors are also looking on the 5G opportunity because most of the carriers today are in a stage that starting to look into the assurance solution. They are looking on their 5G network. Some of the early adopters like Rakuten already closing the agreements.

Some it will take a couple of [indiscernible], but 5G is where everyone is targeting. So competition is eyeing also on this space, but we believe our technology, some of it gives potential [ph] is going to be position us very well in those opportunities..

Great. I'll cede the floor. Look forward to seeing you next week. I understand you have a very packed schedule, some support to that. Thanks..

Thank you, Alex..

The next question is from Matt Stotler of William Blair. Please go ahead..

Hey, good morning. Thank you for taking my questions. I guess, first, we'll start off with maybe just asking Alex's Rakuten question a different way. So you've talked about kind of moving pieces here. You're supporting the 4G network. Obviously, they had a limited 5G launch last month and are planning the standalone network in middle of 2021.

I would love to just get an update on how you're thinking about, how this partnership, this progress is being reflected in numbers? How this is expected to be reflected going forward, given these moving pieces? And then on top of that, maybe an update on -- thoughts on other adjacent opportunities with Rakuten from here?.

So this deal is, as you pointed out, it's very important milestone in the 5G space. But it is also a multimillion dollar deal that it's going to be spread over a multi-year agreement. It cement our partnership with Rakuten and it increase our visibility to 2021, as significant part of the revenue is going to -- is planned into 2021 onwards.

There are additional opportunities as we go and as we continue to maintain healthy relationship, and we continue to work with Rakuten on different innovations. But for sure the 5G agreement is very strategic for us. It's being one of the first, if not the first, contract for 5G automated assurance in our market.

We see this not only as a multimillion dollar deal that is significant for us, but also on the partnership that will continue. First of all, it's a proof of our technology, but also that this will drive us to continue to innovate, to continue to invest in our product and will help us also in other opportunities.

As we all follow Rakuten use, Rakuten are looking and actively marketing their RCP, the Rakuten Cloud Platform globally to different operators and projects around the world. As being the assurance provider of choice, it gives us a lead position if those opportunities will evolve.

So there is a -- currently the activity we are doing with [indiscernible] in Japan. [Indiscernible] with Rakuten will be able to expand. About Japan, this might be an additional opportunity for us, but we are not expecting this is in the very short -term.

This is -- maybe a mid-term opportunity and depends on Rakuten's success to market their technology..

Right, right. That's helpful. And then just in terms of, kind of the broader set up of POC that you guys have kind of a process at this point. You talked about having a number of POCs and workshops. You've spoken previously about, kind of having ongoing POC with Tier 1 customers.

Can you just give us an update on the number of proof-of-concepts that you have in progress, and are you seeing an increase in POCs and workshops at this point? And I mean, any other details that you can provide on how that pipeline is shaping up today?.

So we are seeing a -- I would say, an overall increase in the 5G environment. It's an increase that is becoming because of the 5G market is getting the momentum. We were waiting for the 5G to mature and for operators to take a more serious investment in this space.

And I believe also that the time pass between operator investing on the 4G to now that's their 4G incumbent solution of getting in some cases outdated, make operator more open to look into investment in the new assurance solution. So I think the overall message is positive. I'm not sharing the exact numbers for competitive reasons.

But the overall momentum is positive. We see the market is growing and we expect this to continue, while more and more operators will start to invest in the 5G network and then we will need new 5G assurance solutions..

Right. That's super helpful. Just a couple more for me. Given where we are in, at the early stages of operators thinking about, and becoming more serious about investing in 5G adoption, we're kind on the precipice.

As you kind of laid out, operators are looking at kind of hardware infrastructure and kind of getting to the point where they're looking for assurance solutions.

So given where we are in that process, how do you expect to ramp your hiring or your overall OpEx ahead of this? And then how you expect that to be kind of reflected in the overall OpEx going forward?.

So, overall, as you could see in the last few quarters, we managed to keep our operation expense in a similar level. We invested in our R&D ahead of the market because we were looking forward into this technology, and this is what you want to do when you believe that there is a strategic opportunity.

So our R&D level is currently similar to as we could see in the last couple of quarters. We are now starting our open end meetings for 2021 and budgeting. And please be patient for the next quarter when we can release our plans for 2021.

But we are not looking to -- I don't see a need for a significant increase on the R&D because we have a very sizable technology group that and that technology and the product was already launched. So we are going to continue to invest there, but it's not that we are going to double up on something like that..

Yes. Understood. And then last question for me. Obviously, a lot of exciting new deals, new customers that are kind of layering in for the foreseeable future.

When you look at your existing contracts, any meaningful renewals that you would point out that are coming up in 2021 and or maybe thoughts on, how much revenue is tied to upcoming renewals on the other side?.

So, in any given time we are busy with renewals. There are -- our contracts are typically 3 and up to 5 years. So -- and we have typically multiple contracts with each customer like we see now we have the contract for the 4G with Rakuten and we have the contract for the 5G. So this is our life and we are used to it.

We are working closely with our customers to make sure they are satisfied for our services and appreciate our technology. You can say in general, that in every given year you have a portion that is required, the new one..

Got it. Thanks for taking my questions..

Thank you, Matt..

[Operator Instructions] The next question is from Abba Horowitz of Old School Partners. Please go ahead..

Hi, good afternoon..

Good afternoon..

I was wondering if you could talk about the R&D first. At what point do you think that the R&D is going to stop that there'll be less of a need to invest in that forward R&D or as a percent of revenues, at least that the R&D will stop going up..

So I think that we are not going to stop the R&D investment. This is nominally because, we believe that in our space innovation is always required. If you look on the last three quarters compared to last year, you see that the R&D percentage wise decreased, I think about 4% or 5%. And this is mainly because of our revenue growth.

We are [indiscernible] about the same R&D investment, while increasing the revenue and by that the percentages is lower.

As I mentioned to Matt, we are still working now on our work [ph] plans, but I would say that we are looking to keep similar levels of R&D also next year, and maybe some more disclosed, but not something significant while our revenue continue to grow. It means percentage wise, it's going to be a bit lower..

Okay. Because I mean, what I see here is the R&D is your biggest expense. And clearly if you were to get some revenue growth here and keep that R&D somewhat steady on an absolute basis, you would actually be very profitable at that point because your gross margins are so high.

And that's why I want to understand here is what can we expect for R&D next year? Will it be 14% -- Will it -- sorry, will it be a $4.5 million number of quarter.

Is that what you're anticipating or is it going to 6.5?.

It's a bit too early because we are now just starting our [indiscernible] for next year. But as I pointed, I would say that a good estimate is that we'll keep it on a similar level than this year. As you could see that also previous it was about similar size.

And the reason is because -- not because -- we don't see any [indiscernible] but because we started the investment 2 years ago, or even more, because we looked forward for the 5G opportunity and in order to release the [indiscernible] banks on time, we needed to have a head of time motivated investment. And this is something we are looking forward.

This will pay off now that the 5G market stuff it will be a momentum. So I would say a good estimate is that we will keep it on similar levels maybe with a modest growth..

Okay. Okay, because I think -- just before you talked about it, it won't double. So I was wondering if it's not going to double, but it's just going to be up 20%, 30% and you're really saying that it's going to be flattish for next year..

Yes..

Okay. Wonderful. Also can you give us a sense of how you're seeing 2021 unfold in terms of new contracts.

Is there anything in the pipeline that seems as though that it's almost done or is it the kind of thing that you feel like it's more second half story in 2021, whereas are there deals actually that you're starting to see even now?.

So we look forward to end of the year and the first quarter of 2021 to see the first deal of around 5G. We are happy to the Rakuten agreement. We managed to do it early, the -- Q4, which is head of our expectations, and we are continuing to engage both with our existing customers and new opportunities, or multiple accounts.

We see opportunities in different levels. It's really hard to estimate the timeline in the telco space because sales cycle is typically long, and it could move between quarters. But it's a possibility that we would see also additional [indiscernible] in the first part of 2021. But it also might -- some of them might delay to the later part.

We are keeping very focused on the Tier 1 customers and engagements. And I think what's important to remember is that the overall trend is positive. There are more and more investment in 5G. The market, the services [indiscernible] for the 5G is growing and we are well positioned there.

So it's mainly a matter of time, when we will be able to capture those opportunities..

Okay.

Would you agree though that 2021 should be the breakout year for 5G for RADCOM?.

So we are all hoping for that. And we are looking and continue to invest with our customers and opportunities. It's still very early to determine that, but we are going to be fully focused, execute on our opportunities, and we hope that the market positive momentum and investment in 5G will continue.

And customer will mature still 2021 is still the early adopter for 5G. If you look on the analysts, we are talking about the trend that is going to be with us in 2021 to probably 20,24 and '25, all the investment in 5G. So it's going to ramp up. For us, every [indiscernible] is significant.

We are working with multimillion deals and every new win is significant. So we don't need to win tons of account in order to grow the company. But the opportunity is not going to end in 2021, I would say it on the other side, because more operators are going to continue and invest also in 2022, 2023.

As it moves from the early adopters to the main market, and then the late adopters, maybe in the less developed areas. This answer your question..

Yes, yes. It's essentially, there's a long runway of business for you guys over the next couple of years, which I think means it's a multiyear growth story.

I also just -- I wanted to know this quarter, did you generate cash this quarter from operations?.

Amir?.

Yes. In this quarter we ended with $65 million. In the second quarter, we ended with $66 million. So it was a small chain and basically it's kind of a breakeven. We didn't burn any cash. There was a [indiscernible] payment that we received after the quarter ran about to $2.4 million. This is what this is, this is the difference..

So -- excuse me. So next quarter, we should see more like $67.5 million..

Depends. Depends on the [multiple speakers]..

Okay..

We have [indiscernible] 1 million here to 1 million there. So nothing is going to mark, again..

So last quarter, if I remember correctly, you generate around $4 million from operations?.

Yes..

And this quarter you generated essentially with those extra -- that extra money, about $2.5 million, let's say?.

About 1.5, yes..

Oh, 1.5, sorry. Okay.

Do you expect to be cash flow generating cash in Q4?.

That's what I'm talking about. Basically, I think that depends on the customer payments [indiscernible] be less than 1 million. It can be up by 1 million. This is the range..

Okay. Okay. Fair enough. All right. Very good. Thank you guys. Thank you very much and congratulations on a really nice quarter..

Thank you, Abba..

Thank you..

There are no further questions at this time. This concludes the RADCOM Ltd. third quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect..