Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Results Conference Call for the First Quarter of 2024. [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 Hilik Itman, RADCOM's Interim 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 have not downloaded it yet, 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 momentum growth, future profitability, expected levels of gross margin, its ability to drive the business forward in 2024 and beyond, its full year 2024 revenue guidance, opportunities to expand sales with new logos for 5G and in the cloud and GenAI ecosystem, its pipeline, its leadership and innovation in artificial intelligence and as a cloud assurance vendor, the potential benefits of its Software-as-a-Service solution, the ability of RADCOM ACE on Amazon Web Services to allow operators to achieve higher levels of automation and insight, future investments by operators in their network and 5G, its expectations with respect to research and development and sales and marketing expenses and headcount as well as grants from the Israel Innovations Authority and the company's expectations with respect to its relationship with Rakuten, AT&T and DISH.
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 of 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 noncash stock-based compensation expenses that have been expensed in accordance with the ASC Topic 718, financial income (expenses), acquisitions-related expenses and amortization of intangible assets related to acquisitions.
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 and 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 Hilik. Please go ahead. .
Thanks, operator. Good morning, everyone, and thank you for joining us for our first quarter 2024 earnings call. My name is Hilik Itman. Before being appointed by the Board of Interim CEO, I served as RADCOM Chief Operating Officer since 2020. I was responsible for the product development and Customer Success teams.
Before becoming COO, I served as Vice President of R&D from 2015 to 2020. During this time, I led the product transition [ from ] software to [ virtualization ] and finally to the cloud, including all the additional AI powered capabilities and automation features provided to our customers as part of our solution offering.
I want to thank the Board for trusting me to lead the business as Interim CEO. Since a [ few ] in the role, I've worked closely with the management team to ensure business continuity and that our positive momentum and profitable goals continue.
The mandate is clear and we are laser focused on leveraging market opportunities to expand ourselves with new levels for 5G. Turning to the first quarter results.
We continued our strong positive momentum for 2023 into the first quarter of 2024 with record first quarter revenue that increased by 17.5% year-over-year and then [ 10 ] consecutive goals quarter. We achieved our highest level of cash levels and in the quarter with $85.3 million.
We continued our profitability strategy and achieved positive income on the GAAP and non-GAAP basis. We [ had an encouraging ] start [ to ] 2024 by renewing our multiyear contract with one of our key strategic customer, Rakuten Mobile. We continue to extend our collaboration, strengthen our partnership with this innovative operator.
The contract extension included advanced AI-powered analytics for its private cloud, enabling Rakuten Mobile to drive more automated network operations for its nationwide rollout. The partnership with Rakuten demonstrates our market leadership and innovation in AI, automation in the telco network cloud and 5G. In addition, we announced that the U.S.
telecom operator extended its contract to use RADCOM ACE. In this contract, the value we offer is that our solution will run on AWS as a SaaS. It is also available on other cloud platforms. Deploying RADCOM ACE on AWS will enable this operator to achieve a higher level of automation and gain [ with some ] insight into the network.
Operator rely on assurance to navigate a small transition to 5G and the cloud, and our goal is to be the leading assurance provider for this transition.
Hence, we want to offer telecom operators the ability to choose whatever cloud provider or deploy the model they want and use our innovative assurance technology to manage their network transformation. SaaS is a popular cloud computing offering that delivers a turnkey solution.
Operators can access our cloud-based assurance software quickly and gain its benefit as it has already been installed and configured. It also offer cost saving as operators don't need to invest in additional infrastructure. Furthermore, operator can scale the solution usage up and down based on specific needs.
Offering SaaS provides customers with flexible options that can generate more sales opportunities for us in the future. These projects reinforce the importance of our strategic journey to become a leading cloud assurance vendor and offer operators flexible SaaS options for deploying assurance in the cloud. Turning to our customers and sales pipeline.
We continue to provide innovative software announcement and new releases to our installed base customers to help them manage their network, deliver more automation and safe operational costs. AT&T and DISH remain key strategic customer, and we believe our business will remain strong.
In addition, as I noted previously, our business with Rakuten Mobile remains strong following the renewal of our multiyear contract. Our pipeline is healthy based on our RADCOM ACE product line and include a good mix of new and existing customers.
We see significant growth potential in our pipeline and have increased our sales team to ensure we fully capitalize on the growth opportunities ahead of us. We continue to work within the 5G cloud ecosystem for private, public and hybrid networks. In the public cloud, we offer potential customers integration with all 3 leading public cloud providers.
Our investment in the cloud ecosystem are bearing fruits, and we believe our integration with cloud providers will help generate additional opportunities. In the previous call we mentioned the importance of GenAI and that all the leading public cloud providers or hyperscalers are [ emerging ] us having a pivotal role in a GenAI ecosystem.
We see an opportunity to use our unique telco centric assurance skillset to help operators manage their network as they partner with hyperscalers entering the telco space to facilitate operators' smooth transition to the cloud.
Last year, we announced our position as one of the first assurance vendor to harness the power of GenAI for real-time management of 5G networks, RADCOM network.
Our team continues to work on embedding GenAI technology into our solutions to enable innovation that helps operators manage their networks more dynamically and [ efficiently ] through AI and automation. As part of this effort we announce the integration of our GenAI application with AWS.
Although, GenAI is in the innovation stage, customers see our innovation and [ our thought ] leadership in this space, which can be a door opener that leads to other sales opportunities. We continue to engage with operator global through our sales and marketing activities, including direct meeting standard, processes and conferences.
Operators are continuing to invest in the networks and roll out 5G. In the current macroeconomic landscape, operators are looking for innovative solutions to help them reduce costs while seeking additional revenue, use the significant investment in 5G.
In addition, operators must ensure the subscribers enjoy top-quality services in this highly competitive market, a critical use case for assurance. This is an opportunity for RADCOM.
Operators can use our solution to ensure service quality while driving operational efficiencies and generating revenue through service like private networks for enterprise customers. RADCOM continues to be engaged in multiple opportunities for our innovative solution at different stage of maturity.
We continue to enhance our software with additional automation, intelligence and AI-based capabilities and integration into the cloud to add value and expand our customers' use cases. The North Star that guides our product road map is to make networks more intelligent and autonomous through AI-powered analytics.
We will continue innovating to help operators become more efficient and increase revenues for 5G. We announced Generative AI application support for Amazon Web Services so operators can roll out new services passed on AWS, while improving operational efficiencies using RADCOM ACE enhanced by Generative AI.
RADCOM is a company with many years of expertise in the telco space. We know how to analyze data and deliver viable insight into the telecom operators. So we approach all our product innovation from this unique perspective, starting from a foundation of a good data and telco domain knowledge, by building GenAI products on top of the solid foundation.
We are leveraging our know-how to provide innovative solutions that enable operators to use natural language to tap into the wealth of data RADCOM ACE produces, helping operators work faster and more cost effectively.
To summarize, based on our good visibility into 2024, overall market opportunity and unique market position, supporting telecom operators as they roll out 5G and optimize costs. We remain well positioned to drive the business forward in 2024.
Our multiyear contract also provides a strong backlog, driving consistent results and giving us good visibility. We are confident in delivering the fifth consecutive year of revenue growth, increasing our profitability and continuing the last 4 years of growth momentum.
This gives us the confidence to raise the lower end of our 2024 revenue guidance to $57 million to $60 million. 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, Hilik, and good morning, everyone. To review our financial performance, while the slides contain GAAP and non-GAAP results, I will mainly refer to non-GAAP numbers, excluding stock-based compensation, acquisition-related expenses and amortization of intangible assets related to acquisition.
Now please turn to Slide 8 for the financial highlights. First quarter revenue grew by 17.5%, reaching a new record of $14.1 million. This represents a nineteenth consecutive quarter of year-over-year revenue growth and an increase from $12 million in the first quarter of 2023.
At the same time, we continue to manage and control our expenses while investing strategically and efficiently in increasing our investment in sales and marketing. This resulted in non-GAAP net income of $2.8 million for the quarter. Our gross margin on non-GAAP basis in the first quarter of 2024 was 74%.
Note that our gross margin can vary slightly from quarter-to-quarter, 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 2024 on a non-GAAP basis were $4 million, a decrease of $168,000 compared to the first quarter of 2023.
With the market evolving rapidly, our continued investment in research and development to extend our technological leadership within this space is [ vital ]. This is a key enabler for our future business.
We will continue to invest strategically in R&D and maintain similar expenses as in 2023 to enhance our RADCOM ACE solution, increase our 5G capabilities, expand our AI driving insights and seamlessly integrate our solution into the cloud.
Excluding any impact from exchange rates, our R&D expenses in the next quarter will remain at a similar level with a slight increase. During the quarter, we received a grant of $209,000 from the Israel Innovation Authority compared to $262,000 in the first quarter of last year.
As a result, on a non-GAAP basis, our R&D expenses for the first quarter of 2024 were $3.8 million compared to $4 million in the first quarter of 2023. We expect the Israel Innovation Authority grant to remain at a similar level in the second quarter.
As announced in previous calls, we continue strategically investing in sales and marketing to expand our business and capture more opportunities in the 5G market. Towards the end of 2023, we made an incremental investment in sales and marketing.
In the first quarter of 2024, sales and marketing expenses reached EUR 3.8 million on a non-GAAP basis, an increase of $747,000 compared to the first quarter of 2023. In the following quarters, we expect a gradual increase in sales and marketing expenses to support an increasing pipeline of opportunities.
G&A expenses for the first quarter of 2024 were $1.2 million on a non-GAAP basis, an increase of $210,000 from the first quarter of 2023. Thanks to increased revenue and careful expense management, operating income on a non-GAAP basis for the first quarter of 2024 was $1.7 million compared to $800,000 for the first quarter of 2023.
Net income on a non-GAAP basis for the first quarter of 2024 was $2.8 million or $0.18 per diluted share compared to $1.8 million or $0.12 per diluted share for the first quarter of 2023. On a GAAP basis, as you can see on Slide 8, our net income for the first quarter of 2024 was $762,000 or $0.05 per diluted share.
This compared to a net income of $621,000 or net income of $0.04 per diluted share for the first quarter of 2023. At the end of the first quarter of 2024, our headcount was 296, the same as the previous quarter. We expect our headcount to remain similar in the second quarter. Turning to the balance sheet.
As shown on Slide 11, our cash, cash equivalents and short-term bank deposits were $85.3 million as of March 31, 2024 That ends our prepared remarks. I will now turn the call back to the operator for your questions. .
[Operator Instructions] The first question is from Alex Henderson of Needham & Company. .
It's a nice quarter and certainly, a great start for 2024. I wanted to address the linearity implied by the large beat in 1Q versus only taking the low end of the guidance up.
Was the first quarter a little of a lumpy quarter in terms of a lump into the quarter? And hence, we should anticipate a more moderate result in the upcoming quarters in terms of the year-over-year growth rate?.
Okay. So as you saw, we raised the lower end of our revenue guidance, and we updated the guidance to $57 million to $60 million, which means that we are likely to have a higher second half of the year in terms of the revenue. And if no change in the [ ForEx ], we expect a similar trend on the bottom line.
As announced in the previous calls, we continue strategically investing in certain marketing to make sure we have clear visibility and enough boots on the ground to capture more opportunities in the 5G market. So part of the revenue increase will be used for sales investment, but most of it will go down to the bottom line. .
So in the second quarter relative to the first quarter, it's fairly stable sequentially, I assume?.
Yes. .
Looking at the pipeline, you obviously had some nice news on Rakuten. The deal with Rakuten does sound like it's an expansion, not just a renewal.
Can you talk about the size of [ upsell ], how that's going?.
So the renewal of the contract is going... .
Yes.
So can you talk about the upsell to your larger partners, not just Rakuten, [ AT&T ], DISH as well as any others that you want to mention or put together? What is the large cohort of the top Tier 1s look like in terms of ability to upsell in '24 and to that matter into '25?.
So about the contract with the Rakuten, the renewal is in the same way as the previous one, but it is a few opportunities for extension around the AI products and services. We have -- we exist with our existing customers, different opportunities in our pipeline, and we believe that some of them will be executed in the second half of 2024. .
If I were to look at the pipeline, I think you said it was evenly split between both new customers and existing customers.
Is that how you're expecting the incremental growth to play out? Or is it more due to new customers driving the upside to the revenue?.
No, both, also from existing and from new customers. The -- our pipeline is including mix of opportunities from existing and from new customers. .
So evenly split between the 2? Or is there a bias to one type versus the other?.
No. It's 50-50. .
Okay. Just in terms of the new products, I think you guys have had a fair amount of new technology announcements and new product announcements.
Can you just talk a little bit about whether that's something that's starting to [ metastasize ] into the revenue streams?.
I can talk about the technology side of this product. Actually, the GenAI now is bringing to the table a new very dramatic opportunities, I mean, technology-wise, and we are actually [indiscernible] a lot of information.
And our product is based on a lot of knowledge in the telecom, especially in cellular fields and the combination between the 2 of these spaces, I mean, the information that we capture and analyze the [ sale ] in our customers and the GenAI capabilities in understanding a lot of information and knowledge base bring a lot of significant capabilities for us.
And we believe it will bring a lot of opportunities in the future and even now with the engagement that we have with customers in this area. .
The next question is from Arjun Bhatia of William Blair. .
Very nice job on [ the ] start of the year. Maybe actually to continue on that last point, like when you think about all the new capabilities and all the innovation that you've added into the platform, obviously, you're doing a lot with AI, with analytics, et cetera, [ rising ].
How do you think your pricing strategy might evolve as you look at your existing customers? Obviously, it's sticky and you want to capture the value, so just talk about whether you think there is pricing power over time and how you maybe intend to use that as a lever?.
So... .
No, it's [ generalized ] -- Okay, yes, [indiscernible]... .
I will [ first ] refer to the test model. So if you look at the test model for example, so it's a win-win situation. On the one hand it's the savings cost for the operator and the operator saving infrastructure. And so as for RADCOM it's more operators will switch to the SaaS model.
The marginal cost will decrease, and we will improve our cost [indiscernible]. So this is from the financial effect.
Hilik, do you want to add anything?.
No, no. It's okay. .
Got it.
And then -- so I guess the other piece is just, as you're making more sales and marketing investments, can you just help us understand a little bit about how those are, how you're executing on those? I mean is that mostly new sales reps that you're hiring to go after new telco accounts that you don't have as a pipeline conversion? I assume a lot of this I think we touched on this a little bit last quarter that it's following the 5G ramp, and that's kind of where you're really focusing.
But how is that -- how is kind of execution on that front going and where are the new reps kind of been targeted?.
So we are following [ very carefully ] the evolution of 5G and primarily the projects and there on -- and as we announced in our previous call, [indiscernible] to the early adopters in the market in North America and in some advanced countries in Asia like Japan and South Korea. And there we focused in the last few years.
In the last year, we started to see that more we can start to progress, mainly in Europe and you know that the Europe is [ always ] better. There are more operators in a small country.
So we want to have enough coverage and to make sure we have enough boots on the ground [ let's say ], and telco we extended our investment in sales and marketing and the [indiscernible] team in order to make sure that we capture more and more opportunities and increase our market share.
You may see this increase has already been reflected in the results of the first quarter. And we see an additional increase, a gradual increase in the second half of the year.
Does that answer your question, Arjun?.
Yes. Yes. Very helpful. .
The next question is from Jeff Meyers from Cobia Capital. .
Congratulations on a good start to the year. Kind of just wanted to ask about your cash position. It's your all-time high.
What are your thoughts about that? Have you thought about the share buyback or tender offers, something along those lines?.
So in the last 3 years, we generated about $15 million, and it gives us a very strong position in the market and the [ outset ] to engage and to take more risk. Last year we did our first M&A transaction, and we want to make sure that we have enough cash and sufficient level of cash to execute other relevant opportunities of M&A.
Dividend or buyback is something that is being discussed. And the Board and the company may allocate a limited level of cash for this purpose. But we don't see it as the key -- the strategic use of our cash.
We use our cash for stability, for increasing our market share, excuse me, and as I said, we want to maintain a sufficient level to engage and to make another M&A transaction. .
Understood. I mean, I think you guys -- it seems like you have enough cash to do all 3 things, to maintain stability, do buyback and any acquisitions you might look at. But congratulations again. .
The next question is a follow-up question from Alex Henderson of Needham & Company. .
So listening to virtually every person who sells into the telecom space, it seems pretty clear that most of the telecom industry is under duress and cutting back on their budgets and spending. There's clearly been some challenges around the 5G core in terms of delivering a true multi-vendor modern API-driven micro service-based architecture.
And so when I talk to virtually every other company in the category, they're telling you that we're kind of in telecom [ winter ] here and that the pace of adoption of 5G is going to be slower than originally expected, with challenges around delivering some of the advanced architecture, new features like network slicing and the [ like ] that were intended to monetize the 5G investments.
So yes, I think it was obvious that AT&T had tried to go down the path of a multi-vendor and ended up with cutting out Nokia and going with Ericsson.
So how does all of that affect you? Are you negatively impacted by it? Or are you alternatively -- and I think is the right answer -- The answer to the problem and actually amplified by those issues because you're the solution to get them to the next plateau?.
Yes. Exactly. I think in order to understand the 5G evolution in the right context, that all the technology transition are derived from some [ valid ] and strong business. So actually, 5G is, I think, is the only way for transition to more than software-based and cloud-based networks for the telecom.
So from what I see, and we saw that the telecom is -- keep going to the -- on the autonomous journey. And I think that the trend is already at the station. I know that there is some difficulties, but again, we are in the best position in this space.
And we have a lot of things to bring to the table to help them with this journey, with the assurance and not -- and even with new aspects. So I think that we are in a good position and all this 5G transition and autonomous network position, I think it's going together and I don't see any way that it will not [ happen ] eventually.
You have more questions about it?.
Well, there's clearly a problem, right? I mean, I don't think there's any issue that anybody believes that the 5G core is working as expected. And AT&T was kind of at the center of that with the decision to go multi-vendor to standardize on Ericsson.
So given the observation that this problem -- is the Rakuten says the RADCOM products, the key to solving those problems, and so instead of slowing investment, they're actually accelerating investment with you?.
Yes, that is true. I think that the fact that we are dealing with this space, with all the 5G and cloud-native transitions, and we bring the platform that customers relying on with these transitions. So it's put us in a good position. We saw it in -- with all the customers that we are working with around all this 5G transition.
In the newcomers, it's very significant that we are -- that they are relying on our technology because they reduce cost by reduced people and we are in the best position because we are -- with our platform you can manage your network more efficiently and more scalable manner. So yes, I think it's very helpful to work with us on this area. .
Thank you. This concludes the RADCOM Ltd. First Quarter 2024 Results Conference Call. Thank you for your participation. You may go ahead and disconnect..