Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference Call for the First Quarter of 2023. All participants are presently in a listen-only mode. Following management's formal presentation, instructions for the question-and-answer session will be given.

For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded and will be available for a replay on the Company's website at radcom.com later today. On the call are Eyal Harari, RADCOM's CEO, and Hadar Rahav, RADCOM's CFO.

Please note that management has prepared a presentation for your reference that will be used during the call. If you still need to download it, you may do so through the link in 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 full-year 2023 revenue guidance, as well as revenue from its business with AT&T, levels of gross margin, operating expenses and headcounts, expected growth in 2023 and beyond, expectations regarding the enterprise market for telecom operators, including trends in the market and the effect of general economic conditions, continued investment in and benefits from research and development, its expectation to gain further interest from operators and play an important role in facilitating the transition to 5G, the potential to leverage Continual’s technology and products to the benefit of RADCOM with Vodafone and other customers, its expectations about its pipeline, opportunities, leadership position and momentum, further demand for its products and growth, the Company's expectations with respect to its relationships with AT&T Rakuten and potential grants from the Israeli Innovation Authority.

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 and the Company's SEC filings.

In this conference call, management will refer 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 stock-based compensation expenses, non-GAAP results provide information helpful in assessing RADCOM's core operating performance and evaluating and comparing the results of operations consistently 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 included in the quarter's earnings release, available on our website. Now I would like to turn over the call to Eyal. Please go ahead..

Thanks, operator. Good morning, everyone, and thank you for joining us for our first quarter 2023 earnings call. We continued our strong momentum from 2022 into the first quarter of 2023 with a revenue increase of 13%, compared to the same quarter last year, a 15th consecutive quarter of year-over-year growth.

Our solid performance and careful expense management improved all our profitability KPIs. We also introduced some new product use cases built using advanced AI for 5G. This quarter we significantly improved our profitability, tripling our non-GAAP net income, compared to the first quarter of 2022 and achieving a 15% non-GAAP net margin.

In addition, we are happy to report that our GAAP profitability reached a four-year high, driven by solid team execution and increased revenues. We also had an encouraging start to 2023 by securing a new logo in North America.

Our solution will smartly collect, process, and analyze traffic in a highly automated way across both 5G and 4G networks, which helps the operator deliver high-quality services nationwide, while proactively ensuring great customer experiences. This exciting news continues the positive momentum since the beginning of 2022.

5G networks continue to roll out with telecom operators investing in infrastructure and new technology, while ensuring the seamless transition for some customer, so they receive top-quality services. At the same time, operators must be efficient and keep the costs at a reasonable level.

Operators can use our innovative assurance technology to manage the network through actionable insights to ensure excellent customer experiences, while saving OpEx and driving automation. This is our added value, which is why operators turn to our solutions.

We continue to develop our AI-driven use cases to push our vision of autonomous networks that will help operators deliver great user experiences, save costs, and monetize their services.

During the first quarter, we announced that we partnered with Rakuten Mobile to offer the telecom industry’s first Network Data Analytics Function, NWDAF in production. RADCOM NWDAF is a complementary product line to RADCOM ACE and part of our long-term vision of helping enable autonomous networks.

The overall NWDAF market is at its very earliest stages, so the product will not generate revenue in the short-term. However, it is an important investment for the future as it is a native network function deployed in an operator’s network and not an add-on. It uses the advanced AI to enhance the customer experience and drive closed-loop automation.

This partnership with Rakuten demonstrates our market leadership and innovation in AI, automation, and 5G. AT&T remains a key strategic customer, and we believe our business will remain strong.

Last year, we announced that AT&T renewed its multiple-year assurance contract with RADCOM as we continue to expand our relationship by providing additional value and cutting-edge software releases. We expect revenue from AT&T in 2023 to remain at a similar level to last year, with the potential for further growth. Turning to our product innovation.

We continue our commitment to delivering innovative solutions as we enhance our software with additional automation and intelligence AI-based capabilities to bring the value and expand use cases for our customers as 5G technology moves forward. During the quarter, we announced RADCOM’s Virtualized Network Operations Center or vNOC.

This new use case is powered by extensive AI and enhanced with our telco domain knowledge to digitalize the network operations center for 5G. The vNOC helps operators transition from manual operations to automatically detecting anomalies and performing root cause analysis.

This enables operators to solve customer-affecting issues and drastically improve resolution times, making network teams more efficient, while saving costs and improving the customer experience.

We also advanced our cloud expertise, announcing tighter integration of RADCOM ACE with Amazon Web Services, AWS, so operators can gain complete assurance lifecycle management on AWS to drive network automation. This provide operators adopting the public cloud with extensive operational agility that saves OpEx and enhances the user experience on AWS.

We believe our integration into the cloud providers will help generate additional opportunities. In February, our sales team attended the Mobile World Congress in Barcelona, Spain, the leading telecom industry event, with an audience of almost 90,000 people from 202 countries.

We were excited to once again engage in face-to-face meetings with customers, top-tier operators, and partners. We had many positive meetings, including interest in our new mobility experience offering acquired from Continual. We believe that some of these meetings could lead to new sales opportunities.

As we covered in a recent blog post on the event, we saw evidence of our belief that automated assurance will be vital for 5G network operations. Operators must make their network more intelligent, dynamic, and autonomous to deliver quality 5G services. So, strong themes were the transition to the cloud, network automation, and the importance of AI.

All these are areas of interest for RADCOM, and the 5G market remains promising, while still in the early stages. The complexity of these new 5G network architectures requires automated assurance solution to provide the cornerstone to building a network with extensive automation. We also hear this from our customers.

Now I would like to provide more color on Continual. In February, we entered into a definitive agreement to acquire Continual. After satisfying customary and transaction-specific closing conditions and regulatory approvals, we completed the acquisition in May. Continual focuses on telco network analytics, specializing in mobility insights.

These insights enable the operator to understand the movement of their customers and how to improve service quality and coverage, with a particular focus on the radio network and 5G. These mobility experience insights use AI technology and are cloud-based.

So, they fit into our product philosophy and solution architecture, while adding value to our current offering. It will offer a differentiator from our competitors with Continual’s unique, innovative location-based technology.

A modular add-on solution as a possible entry point into new accounts and an additional upsell opportunities into our install base. In addition, it brings us new logos, like Vodafone, and offers us opportunities to expand into different areas. Finally, it adds further talent and telco domain knowledge to our team.

We believe that adding Continual’s advanced mobility experience analytics, and intellectual property, will enrich our 5G assurance solution and create new opportunities for RADCOM.

We see that new figures from GSMA Intelligence published during the Mobile World Congress shows that 5G connections are expected to double over the next two years, expedited by technological innovations and new network deployments in more than 30 countries in 2023 alone.

As operators invest heavily in 5G, they seek new revenue streams to regain their investments and streamline network operations through cost savings. This trend is even more critical with the uncertainties around the macroeconomy. So, we believe our position as an advanced automated assurance provider for 5G will continue to drive positive returns.

Our pipeline continues to be healthy, with a good mix of opportunities from our current installed base and new customers. In 2023, we are gradually increasing our sales and marketing teams to accelerate growth. 5G is moving forward, but rollouts takes time. We are laser-focused on our business strategy and the 5G market.

We believe our position as a leading assurance provider for cloud-native 5G networks and our cloud expertise and knowledge will continue to drive the growth of our business. To summarize. We have continued our strong momentum from 2022 into the first quarter of 2023.

Our solid financial results demonstrate our successful strategy, execution, and unique market position in supporting telecom operators as they roll out 5G. We believe this solid track record will drive consistent financial results in the future and continued improvements to the bottom line.

We have a solid foundation in place for a strong 2023 and a fourth successive year of revenue growth. With that, I would like to turn the call over to Hadar Rahav, our CFO, who will discuss the financial results in detail..

Thank you, Eyal, and good morning, everyone. To help you understand the results, I will refer mainly to non-GAAP numbers excluding share-based compensation. Now please turn to slide eight for our financial highlights.

We achieved record revenues in the first quarter, reaching $12 million, representing a 15th consecutive quarter of year-over-year revenue growth and an increase from $10.6 million in the first quarter of 2022. First quarter revenue grew by double-digits, with year-over-year growth of 13%.

This resulted in non-GAAP net income for the quarter of $1.8 million, a five-year high. At the same time, we continue to manage our expenses, while investing in the business strategically and efficiently. Our gross margin in the first quarter of 2023 on a non-GAAP basis was 73%.

Please note that our gross margin may fluctuate depending on the revenue mix. We expect that the second quarter will remain at a similar level. Our gross R&D expenses for the first quarter of 2023 on a non-GAAP basis were $4.2 million, a decrease of $724,000, compared to the first quarter of 2022.

We received a grant of $262,000 from the Israel Innovation Authority during the quarter, compared to $218,000 in the first quarter of last year. As a result, our net R&D expenses for the first quarter of 2023 on a non-GAAP basis were $4 million, compared to $4.7 million in the first quarter of 2022.

We expect the Israel Innovation Authority grant in the second quarter to be about $150,000. Sales and marketing expenses for the first quarter of 2023 were $3 million on a non-GAAP basis, an increase of $407,000, compared to the first quarter of 2022.

G&A expenses for the first quarter of 2023 were $964,000 on a non-GAAP basis, an increase of $139,000, compared to the first quarter of 2022. Operating income on a non-GAAP basis for the first quarter of 2023 was $833,000, compared to an operating loss of $274,000 for the first quarter of 2022. The increased revenue and favorable FX drove this growth.

Net income for the first quarter of 2023 on a non-GAAP basis was $1.8 million or a net income of $0.12 per diluted share, compared to a net income of $614,000 or a net income of $0.04 per diluted share for the first quarter of 2022.

On a GAAP basis, as you can see on slide seven, our net income for the first quarter of 2023 was $621,000 or a net income of $0.04 per diluted share. This compares to a net loss of $592,000, or a net loss of $0.04 per diluted share for the first quarter of 2022. At the end of the first quarter of 2023, our headcount was 277.

We expect our headcount to grow to approximately 300 in the second quarter. This increase includes additional sales and marketing employees and onboarding of the Continual team.

We expect the Continual team’s onboarding to slightly increase our operating expenses, while helping to improve our topline as we integrate the solutions, upsell to our current install base, and sell to new customers as a unique product differentiator. Turning to the balance sheet.

As shown on slide 11, our cash, cash equivalents, and short-term bank deposits as of March 31, 2023, were $77.9 million. That ends our prepared remarks. I will now turn the call back to the operator for your questions..

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

Perfect. Thank you, guys for taking the question.

Eyal, can you talk about some of the AI investments that you're making? What capabilities are you introducing into the platform? And as we kind of roll some of these features out, how do you think about monetizing them? Is that going to be included in the core platform or is that something that you can upsell as customers adopt that?.

Hi, good morning. [Indiscernible] is a pivotal area of investment for us as part of the overall vision for creating autonomous network operation. The main driver for us is to see how we can turn many of our processes used today, expensive engineering teams, and implementing leveraging the AI capabilities to be done in a much more efficient way.

In addition, it also adds a lot of improvements to the time to repair. As if you need to do things manually, it always takes time and you have resource constraints. And if we are able to do it with our AI capabilities, operators are able to identify and solve the efforts much faster. If we look on business side, we are looking in two ways.

Definitely, this is an added sale into our installed base. It's another -- we are packaging it in different applications, creating different use cases on top of our main RADCOM ACE platform. But this is also very key as a differentiator when we are approaching new customers and they are partners on the reasoning to replace their incumbent solutions.

One of the key drivers for them is once we show them the -- improving the network operation and efficiencies, which helps to justify the ROI for a replacement of their own legacy tools. So it's a mix of absence to the existing accounts and also enabler that improve our positioning with new accounts..

Okay. That's helpful.

And then on Continual congrats on closing the deal, what I'm trying to understand what were operators doing to understand subscriber movement before Continual? Like is this a -- is there a tool that they had in place to do this? Or is there something else that you think you'll replace or consolidate as you roll this out and cross-sell into the base?.

So the Continual growth line is actually letting the total [Indiscernible] mention to the analytics we can do. Networks, you always try to analyze them by geographies, by locations and this is a technology and concept that are already in place for telecom.

But the main complexity of mobile networks are people that are taking calls and sessions, while they're on a move, and you can see them in a different location at different time, but you don't -- it's very hard for you to identify the overall journey without a dedicate solution.

So it's actually a very innovative concept that as I mentioned that they are in many times blind otherwise or use, I would say, more [Indiscernible] tools that show them only part of the time chart.

The reason is it's very helpful for them to really isolate the quality issues results specifically due to the ability, because it might be that while I'm making my call, I'm traveling across five states, each of them by itself is providing good quality to the area. But while I'm in transition, I actually get inferior quality.

So operators today do not know how to differentiate that. And by that they are blind into their quality of experience of their subscribers, they over assume that they give better service than they actually do and this conflict makes up the customer less satisfied and more likely to churn.

Mobility is always most complex when we are in a move, maybe when we are in a car that we move in a higher speed, maybe on trains as this really challenge the technology. And we feel this is really a big approach. This is what we like about this company. And it definitely has been to our cutting-edge offering with new application.

So we are very excited on that..

Yes, definitely. That sounds very interesting. I appreciate the color. Last one for me, just when we're thinking about margins for the year, it looks like you're driving some upside here.

How should we think about the leverage and the model throughout the course of this year? And how much room is there to improve the margin profile? It sounds like there's some investments going on in product and go to market, but just help us walk through the cadence for the year?.

So we saw that this quarter, we executed better than even in our expectation and we are very happy with the results. We hope to continue to overachieve and beat our expectations. We do have increase of cost as we augmented Continual team into our operational expense. This is a bit offset by the weakening of the shekel, compared to the U.S. dollar.

But overall, we are looking to -- we increase our operational expense a bit. Before goes well and we continue to grow and win more accounts, we are looking to continue and see the trend of profitability moving.

And of course, we are still relying on the rate of the shekel, if the shipping will continue to be in a similar level, this is very favorable for us, we have some like maybe 5% gain due to the weakening, compared to the dollar as our R&D expense is heavily based on shekels..

Okay, got it. Thank you for taking my questions guys..

[Operator Instructions] The next question is from Alex Henderson of Needham & Company. Please go ahead..

Great, thanks. So I wanted to just get down into the addition to Continual and I assume some additional hiring that you're doing independent of that acquisition. By my math, it sounds like your expectation for headcount is up about 8.5% sequentially.

And so should we be considering that, kind of, rise on average in your OpEx? And can you give us a little bit of a sense of the split between R&D and sales and marketing in that cost addition?.

Yes, Alex. Good morning. We are implementing our headcount, we are looking to inflate our headcount to next quarter in the range of 8%, 9% as primarily by addition of Continual Team, but also without continued increase of investment in the sales and marketing. While Continual Team is mainly R&D.

And on top of that, we had our additional investment into sales and marketing, I would say that this will be around the same ratio for both R&D and sales and marketing, where G&A is going to stay about the same. Of course, it's not taking effect of any exchanges..

So we should be taking about a 10% increase in both sales and marketing and a very minor increase in G&A?.

Again, about 8% to 10%, correct..

Obviously, you're not adding to your G&A from that acquisition. So I assume it's a little higher than the 8% number, primarily with the increase in those key lines..

Yes. [Multiple Speakers].

Alright.

So based off of the strength of the quarter, should we be looking at any sequential growth or is it fairly stable on the top line sequentially as we go out with most of the increase in revenues remaining to get to your target in the back half of the year?.

So we start -- we see that we managed to get over $12 million a quarter based on our recent wins. We are looking to keep improving and add additional revenue quarter-over-quarter. With that, it's very hard to forecast exact -- and when exactly will we have additional upside as we are looking to get more revenue both of our existing new customers.

I think that overall we are going to gradually continue with our plan and we need to make our guidance that we are still feel comfortable that this year will be another growth year for us..

In context of the U.S. wireless market, it's become increasingly clear that there is a challenge around the open 5G core. Many of the service providers appear to be struggling with the mechanics of getting that to work, we've heard that there's going to be a push out in the time that they move from 4.5G to 5G core.

I can read that in two ways, one way to read it would be there could be a delay in spending four-year products.

The other way to read it would be that just significantly increases the need for your products as visibility and analytics are critical to solving the software challenges of doing the open core? So can you talk a little bit about that issue and how it might imply if there's a delay in the timing of the transition to a full standalone 5G?.

Yes. First and foremost, it’s evident today that all telco operators are in the process of implementing 5G and in specific 5G call or 5G standalone is a strategic investment.

This is very important as this is the foundation of our strategies, we build the company and we build the products and technology towards that transformation of telcos this adds for us an opportunity to replace the legacy solution as it's a technology revolution, but it also require operators to move to the cloud.

This being said timing wise, there are some factors that make things more complicated and slower, one of them is the technology itself that is quite complex and not as mature and it takes for the network vendors time to implement and the operators are -- it takes them longer than before.

For us, it's a good thing, because the more complicated the technology is the more in line of solution that covers up, they are. So we are helping them to crack this complexity. We see that customers that adopt our technology like Rakuten and DISH and [Indiscernible] are managing to move faster than others in the 5G space.

The macroeconomy is definitely make everyone pacing their investment, they are shrinking and sometimes we think that with the optimizations and it harder for them to progress with the project. This obviously might create some delay with the investment, but the good thing is that our business model is robust. We are working with the leading carriers.

We have a multi-year view. We have recurring revenue, and even in this environment and delays, as you could see, we are able to perform continuous growth and be prepared to the journey that it will take.

I would want to highlight that my personal belief is that this is the 5G is progressing this is why we are increasing our sales in marketing, but we look at this as a journey. This is not things that happened over the quarter.

But we see the next two years are going to be critical and additional customers and additional operators are going to be great to 5G. So we believe in this space and we’re investing in this space. The timing is always a question.

But you need to [Technical Difficulty] closely with the operator in order to make sure you have the selected solution when they are ready..

So just going back to the point, it sounds like, yes, there may be some slowdown in the timing of open cloud based 5G core, but the complexity challenges are being realized in a way that drives increased need for your product and therefore, while it may be a detriment to say a Nokia or an Ericsson that’s actually could be a positive for you guys in that context? The other side of this is the international markets have generally cleaved to a lesser open, but still cloud oriented 5G core.

And that in turn is easier to implement.

And so I guess the question is do you see some acceleration or improved opportunities in the international market as a result of that dynamic?.

Yes, we do think that there is more adoption of cloud technology going back to my comment about Mobile World Congress back in the end of February. We saw the hyperscalers, Amazon, Google or Microsoft taking the prime tension of all telcos.

This was dominated by European carriers and we see mainly a lot more investment by all parties and we start to see more and more projects of telco going into the cloud. This is a good sign for us. As I mentioned, any investment to this direction make our value much higher.

Our differentiator is more critical, and we really believe that this trend could help. 5G progressing in Europe and in Asia and we start to see additional signs in Latin America. For us, we don't look at necessarily on geography. We are mainly looking on the market as our advance operators are with 5G.

The more advanced down with 5G, the more advanced down with cloud, they have a better fit. So we are really targeted in our approach and trying to partner with [Indiscernible] at the moment.

So even if we don't know the pace of the adoption, but we want to make sure that all the early adopters, many of them is possible, our partner will [Indiscernible] and this will help us to continue and innovate, continue to create unique capabilities and raise the bar for any competition this might try to follow..

Okay. Two more questions, fairly brief though. The Continual acquisition obviously has some nice incremental technology. I assume it is not included in your AT&T or Rakuten contracts.

How do you see that technology being adopted by your existing customers? And what kind of uplift would there be to your revenues at individual clients if they did that? In other words, let’s say we're selling just choosing the number randomly here $1 million to AT&T in a year, and they adopted this, would that be $1.1 million or $1.2 million what would the incremental uplift for that adoption?.

So we are still early in trying to introduce this technology into our installed base. Overall, we see excitement from that. And I would say that while currently Continual was a start-up and their revenue level as we mentioned is insignificant to our numbers in this stage. We see a potential that this could grow and help to improve our top line.

I would say this would grow up to 15%, 20% of our revenue if all goes well. But it’s really depends on the adoption, but this is just like an initial sense. We are still looking to continue and introduce it to the market and we are still finalizing the -- all the details, closing gap in just couple of weeks ago.

And I'm sure that we will be smarter in couple of quarters when we started paying our 2024..

Great. Thank you so much..

This concludes the RADCOM Limited first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect..