Ladies and gentlemen, thank you for standing by. Welcome to the Radcom Limited Results Conference Call for the Q1 of 2021. All participants are present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded and will be available for a replay on the company's website at www.radcom.com later today.
On the call are Eyal Harari, Radcom's CEO and Amir Khai, 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 continued investment in technology and R and D, the 5 gs market and industry trends, the company's market position, cash position, potential and expected growth, the company's expectation with respect to its relationships with Rakuten and AT and T, the potential of the Radcom Ace product and the integration with Microsoft Azure, its ability to capitalize on the emerging 5 gs opportunities and win more market share, its potential expansion with a top tier LatAm operator, the potential for additional partnerships with top cloud providers in the future 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 and 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 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.
Thank you, operator, and thank you all for joining us today. Earlier this morning, we issued a press release stating our Q1 2021 results. We are pleased with the financial results as they mark our 7th consecutive quarter of year over year revenue growth. Total revenue for the Q1 of 2021 was $9,100,000 representing 10% year over year growth and a continued improvement of our bottom line. This revenue growth is supported by our strategy of procuring multiyear agreements for software and services, culminating in a significant contribution of recurring revenue.
Our consistent results come from the exclusion of these multiyear contracts with the leading operators globally and our ability to remain agile in a dynamic and ever changing business environment. We are excited about our recently announced win at a top tier LatAm operator as we secured a multimillion dollar order for our Radcom based assurance solution. The selection process involved a multi vendor tender in which the operator analyzed and evaluated vendors on their 4 gs and 5 gs assurance capabilities. This win was achieved based on our innovative technology and advanced capabilities of Radcommains, which provides an intelligent automated assurance platform. Radcommains will enable this talk to your operator to resolve network quality degradations before they affect the customer and as such improve the overall customer experience.
This win expands the deployment of our technology to the operator's mobile network with the potential to expand when the operator transition to the 5 gs network in the future. As mentioned in previous quarters, standalone 5 gs networks are based on cloud native technology, which is why we recently see cooperation between telecom operators and public cloud providers like Microsoft, Google and Amazon. Last month, several operators announced their collaboration to build a cloud based 5 gs network in the U. S. And in Europe.
As Broadcom has been transitioning to cloud native technology for the last few years, this is an encouraging trend. We have already seen this come to fruition as we announced the integration of Radcom Ace with Microsoft Azure earlier during this Q1. This integration with Azure enables operator to assure the quality of their 5 gs services. Radcommates runs as a cloud native function within the public cloud and when deployed on Azure, it is scaled and managed through the Azure Kubernetes service. This integration also exemplify our growing capability to support cloud native operations.
Our advanced cloud agnostic technology and significant telecom experience put us in an excellent position for additional partnerships with cloud providers as we expect customer to deploy in multi cloud environments. In addition, we are currently seeing more opportunities and are engaged with multiple prospects at different stages of the sales cycle. We believe that RedHome is well positioned to win more market share as 5 gs continues to evolve. We are still in the early days of this transition. In North America and several countries in Asia, operators are aggressively rolling out 5 gs, followed by Europe and then Latin America.
In addition, we are seeing several greenfield operators adopt cloud native technologies to roll out mobile services and expand to new market verticals. AT and T remains a key strategic customer for us. In the recent earnings call, AT and T stated that they added nearly 600,000 subscribers in the quarter, which was their best net add first quarter in more than 10 years. Our cutting edge software is embedded into their mobile network and monitors the customer experience as they continue evolving their underlying network infrastructure to the cloud. We continue to deliver consistent cutting edge software releases to AT and T as we support the evolution of their cloud network.
We are also progressing in our partnership with Rakuten in Japan as they aggressively roll out the world's first end to end virtualized network deployed on a nationwide scale. We continue supporting Rakuten with our 4 gs and 5 gs network build. In addition, Rakuten plans to launch its standalone 5 gs network in the Q2 of 2021. In preparation for this, we have moved to the Radcom A software implementation to monitor their standalone 5 gs services. During the Q4, TelecomTV published an interview with Rakuten Mobile CTO on their nationwide rollout and the transition to 5 gs and the importance of Radcom solution in supporting them on this journey.
As Rakuten Mobile CTO stated in the interview, assurance is vital when rolling out greenfield networks, allowing Rakuten analyze events in real time, diagnose them and improve the network, but most importantly, it provides real time data about the true customer experience. In addition to rolling out software releases for standalone 5 gs, Radcom solution is also being integrated into Rakuten's communication platform, which is already being market to operators worldwide and deployed in Japan. Given that Rakuten is a leading pioneer in deploying cloud native technology and transitioning to 5 gs, we are gaining invaluable hands on experience monitoring the first ever implementation of this cutting edge technology. It further serves as a testament of our ability to innovate and build out new capabilities that we believe will increase our market share in the future. As mentioned, when deploying new technologies such as cloud native platforms or 5 gs networks, Assurance play an exceptional role in monitoring service quality, pinpointing network regulations and helping the operator improve the network performance.
Therefore, we expect Rescomains to continue to gain further interest from operators and play an important role in facilitating the transition to 5 gs through real time insight and network performance optimization. We are continuing to invest strategically in R and D to enhance our RASCOM AIS solution, increase our 5 gs capabilities, expand our AI driven insights and seamlessly integrate our solution to the cloud. We are continuing to expand our sales team. And as mentioned, we are currently engaged in multiple opportunities and looking to expand our pipeline as 5 gs gains momentum. Based on the current industry conditions and our visibility, we reiterate our full year 2021 revenue guidance of $39,000,000 to $41,000,000 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 marked another consecutive period of year over year revenue growth. With our Q1 revenue increasing by 10% year over year, we succeeded in improving 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 number, which excludes share based compensation.
We ended the Q1 of 2021 with $9,100,000 in revenue, increasing from $8,300,000 in the Q1 of 2020. Our gross margin in the Q1 of 2021 on a non GAAP basis was 75%. Please note that our gross margin can fluctuate depending on revenue mix. Our gross R and D expenses for the Q1 of 2021 on a non GAAP basis were $4,800,000 a slight increase of $200,000 compared to the Q1 of 2020. During the quarter, we received grants from the Israel Innovation Authority for $68,000 Sales and marketing expenses for the Q1 of 2021 were $2,400,000 on a non GAAP basis, approximately the same as the Q1 of 2020.
G and A expenses for the Q1 of 2021 on a non GAAP basis were $809,000 approximately the same as the Q1 of 2020. Operating loss on a non GAAP basis for the Q1 of 2021 was $1,100,000 compared to an operating loss of $2,500,000 for the Q1 of 2020. Net loss for the Q1 of 2021 on a non GAAP basis was $1,000,000 or a net loss of $0.07 per diluted share compared to a net loss of $2,400,000 or net loss of $0.17 per diluted share for the Q1 of 2020. On a GAAP basis, as you can see on Slide 5, our net loss for the Q1 of 2021 decreased to $1,700,000 or a net loss of $0.12 per diluted share compared to a net loss of $2,900,000 or a net loss of $0.21 per diluted share for the Q1 of 2020. At the end of the Q1 of 2021, our headcount was $273,000,000 Turning to the balance sheet.
As you can see on Slide 9, our cash, cash equivalents and short term bank deposits as of March 31, 2021 were $67,300,000 We believe that our strong balance sheet provide us with the flexibility to execute the opportunities ahead of us and remain agile through global uncertainty. That ends our prepared remarks. I will now turn the call back to the operator for your questions.
Thank The first question is from Bhavan Suri of William Blair. Please go ahead.
Thanks and good morning, good afternoon. And Israel, thank you for taking my questions. I guess, I just want to start at a high level, gents. Just trying to understand if
you could provide some color
on the spending and decision making environment as you're starting 2021. We think 2020 was a good year, let's be clear. But are you seeing some of the prospects were delayed last year beginning to come back online? Are you starting to see maybe the decision making around 5 gs rollouts start to pick or improve? Because we've been watching the trend for obviously not a few years.
There were delays in the beginning because it's not sort of a switch like 4 gs was. Help us think through sort of what that demand environment is looking like given visibility post COVID, things like that.
Hi, Varun. Good morning. Yes, 5 gs is a long term trend that we are monitoring carefully, and we invest our focus on making sure we are capitalizing the growth of investment that's expected in 5 gs. I would say that we see encouraging momentum in the 5 gs era and we see more and more operators taking more active steps towards 5 gs investment. As I laid out the timeline in previous calls, we see a process of operators starting in their investment typically from the radio side by buying the radio frequency, selecting the radio providers and starting to deploy the antennas and then going to the 2nd stage of going more strategically nationwide, investing in their core network, what we also call the 5 gs standalone.
So overall, we see the number accumulating with more operators being committed to the process. We see more operators starting to select their radio vendors and we see more operators starting to select their vendors to the core. As I mentioned, we have increased we increased and keep increasing our sales team in order to capture the opportunities And we follow very carefully the operators as they announce the progress with the 5 gs to make sure we are there and well positioned to be in this opportunity as they advance. There were questions before last year mainly around the COVID and whether it would be creating some delay. I could say that we know telecom processes are taking time.
And I can say overall that it's progressing as expected. And there is a clearly investment in the industry towards 5 gs. There is no question of if, it's a question of when. And I would generally say that these are progressing as expected, and we see more opportunities around 5 gs quarter over quarter.
Got it. Got it. That's helpful. Maybe to go deeper, can you talk a little bit about sort of the backlog or the POCs you have? How are those playing out?
Or maybe even pipeline versus, say, last year, 2 years ago as you think about those opportunities? Some color there would be really helpful.
Okay. So first of all, POCs is one of the questions that always being asked is now with COVID and the function on travel. How are we making a POC happen in this environment? What's nice about Latvom being the fully cloud native supplier is our ability to deliver those POCs also from remote, utilizing our virtualization software doesn't necessarily require us to install physical hardware, which is in these days more complicated. It actually allowed us to accelerate our customer engagement, demos, POCs, and we are involved with many activities with many different customers.
I am not sharing the exact type of information, but what I can tell you is that the number of operators we are engaged is increasing from quarter to quarter, and we are seeing the overall positive trend in the pipeline.
Got it. Got it. No, that is super helpful. Let's touch a little bit on the cloud relationships. Obviously, the Azure relationship was really interesting out there.
I guess, help us think through kind of how that gets monetized, right? So we get the cloud vendors want to be or the telecommunications, the carriers want to have software only cloud based solutions that integrate with applications that run on Azure, some of the software that run on Azure. Radcom's Assurance software, reliability, the network virtualization team, those can all run on Azure. I guess, does that make it easier to monetize? Is that just a longer term secular trend you hope to capitalize on?
How should we think about where the monetization of that opportunity and how that will play out?
I would split it into short term and long term view. On the shorter term, we see operators starting to engage with cloud providers in order to help them to build their 5 gs network. And the relationship with Microsoft Azure and others is in order to make sure that once they are selecting their cloud partner, they know that we are one of the assurance providers that can actually deliver in this new innovative environment that not many of our industry competitors can really play. This is very helpful on the exposure into new accounts. As we know, the cloud providers are marketing aggressively their solutions into the telcos as the workloads of the telcos are being considered as a big potential for the cloud providers.
On the longer term, I believe that more and more telcos will really move to a full public cloud implementation, but this is going to take multi year, maybe 3 to 5 years. And on the long term, our strategic relationship, I believe that this could be very important to be able to deliver our software as a service over those cloud providers when the telecom market will be more mature to consume services on the cloud. So I think it's both important on the short term for enabling the exposure to media deals and to reduce the entry barriers from us working with different carriers that are more advanced on 5 gs, which is where we aim. And on the longer term, this could be even more strategically important as the telecom industry, as I believe, will continue to integrate more and more to the public cloud environment.
Got you. Got you. Very helpful. I might try and squeeze one more in and I was just begging to. But visibility seems to have improved and the business will always be lumpy, right?
Large contracts, it's not 100,000 potential customers, right? It's large carriers. But maybe talk a little bit about the visibility you have this year and how that plays out as more and more of the business becomes a SaaS pure software subscription based model. Help us take through visibility trends that you're seeing this year and then how that might play out? Thank you.
Sure. So our multiyear contracts are allowing us to get more and more bigger and bigger portion of recurring revenue as we deploy software and services on the Tier 1 carriers. We mentioned our engagement in the past, for example, with Rakuten that provide us very good visibility on a multiyear service revenue along the contract period. And as we expanded just in Q4 into 5 gs engagement, which increased our visibility service. I believe that with the win of Rocket and 5 gs on Q4 and this new win in this quarter with the LATAM operator, our visibility increased And we keep maintaining significant part of our revenue has been recurrent, which gives us a very good insight into the yearly targets.
And this is why we were reiterating the guidance for the year.
Got it. Thank you, James. I'll jump back in queue. Thank you for taking my questions.
Thank you, Pavel.
The next question is from Alex Henderson of Needham and Company. Please go ahead.
Great. Thank you very much. I was hoping you could talk a little bit about the architectural commentary around moving to cloud more cloud native. And to what extent your software is based on microservices? And how do you update it over time?
Is it a continuous integration, continuous updating deployment model? Or is it still somewhat monolithic in its architecture? I know that's a fairly heavy lift, but obviously, dramatically improves your agility and applying the market with new features and functionality once it's achieved. Can you talk about where you are on that process?
Sure, Waleed. This is a great question. As the virtualization journey started for Radcom in early 2014, we were starting with, first of all, putting our solution into software and building them in a virtualized environment. And this was already available in 2015. Since then, we were enhancing and maturing our architecture.
And as you are spot on, we are focused today on a microservices Kubernetes environment for all of our solutions. This is exactly what all Radcom A is all about, which was announced on Q3 of 2020. Being involved with companies like Rakuten that are using the cutting edge technology and for those of you who follow the Rakuten cloud platform architecture, this is exactly a fully cloud native microservices architecture and is being the close partner of ours. This is the target architecture that we are supporting and we are these days implemented with them, integrating into their environment. And I would say that we believe that we are quite advanced in our space.
And as you know, we are working with one of the most advanced carriers in the 5 gs in a full cloud native environment. A lot of we keep investing R and D in difficult amounts as we believe that this is our cutting edge. And most of our R and D resources in the last 2 years will go into the transition from the virtualization, I will say, NFV architecture into the Kubernetes cloud native microservices architecture. This is in the last stages of implementation. And as Rakuten are expecting to go live end of Q2 this year, this is where we are targeting to be fully ready to in a GA level.
As you mentioned, there is a big benefit on the operational efficiency for that as we are using, as you pointed, CICD in our development cycle, I would admit that most telecoms are not yet mature to work in this approach and they are more traditional in the way. But definitely, we see more and more operators leaning into accepting a more agile approach as this is what we bring in our DNA. And I believe this trend will continue in the next years.
So clearly, your technology is therefore on the cutting edge in terms of architectural design. It strikes me that if you look at the competitive landscape, you're way ahead in technology 3, 4, 5 years ago, but there is a perception out there that the competitors might be catching up. But I don't think any of them have moved to a microservices based architecture. So could you talk a little bit about what you see from the competitive landscape when you're involved with the Rakuten in terms of that specific issue?
Yes,
sure. I agree with your statement. We're really proud and believe that our technology is way more advanced than the competition. I think the main difference, if you look compared to a couple of years ago, when we started to pitch about virtualization and the importance of virtualization, a few years ago, many of our competitors were in denial. What's different today is that for everyone is clear that 5 gs is going to be cloud native.
And then the marketing of all of our competitors already know to say the right messages. We don't see today any of our competitors catching up, But we have limited visibility to competition. And the message we are hearing from most of the customers we engage with is that what we have is more advanced than what the others can offer. But it's and again, I want to reiterate, it's a difference than before that when we played in the niche that some people didn't believe will mature and become the standard. Now everyone understands that this is what's needed and everyone is following the trend and what we are doing in the last years and trying to catch up with the microservice architecture.
It's my understanding that your virtualized version was competing with hard system refrigerators when you first came public. And it strikes me that the move from most of your competitors tried to figure out how to catch up on a standardized virtualization approach, which means that you're basically running the software in a virtualized manner as opposed to changing the architecture to a recode to microservices based architecture. So if that's the case, these guys are still way behind in terms of that technology. And that's probably the most important delta between modern application companies and anything that's more legacy. So I assume that that's still the case.
Am I correct in that assumption as far as you can tell?
Yes. I think, again, you're spot on. This is our assumption. And in the last 5, 6 years, we spent around $100,000,000 in R and D. And this all goes into those architectures.
I don't believe our competitors were as focused and invested strategically as us. And this is why we believe that our technology is way superior than the competitors in the container environment. And the good thing is that when we see 5 gs architectures, everyone is going towards this direction, and this became the standard de facto in the industry, which this is why we are very optimistic on our position in the market.
So clearly, one of the major benefits of the Kubernetes architecture is the ability to have companies code to open APIs and take advantage of your technology with additional functionality that's external to the company and communicate domain to domain. So in that environment, have you done any integration or are you seeing any hooks into HashiCorp? How are you reaching the coding community? And to what extent do you think that your open APIs are changing the value proposition of the technology?
Yes. When we are talking about the residential environment, one of the changes that is very, very important is the culture. And if you looked on the telecom as it was 5 years ago with the refrigerator and boxes and black box implementations, everyone was closed by nature. When we moved to virtualization, it wasn't only about the change in the product itself. It's a change of the culture of the company.
And the other approach when we're engaging today with operators is where we can fit in and who we can and how we can reach other applications, how other applications can enrich us. It's became a world from deployment of boxes in the field to world of software integrations and making sure you get the most from everything you do. Things we saw before in the IT environment. I believe this trend would continue as more and more networks will move to more software environment. And for us, integration is goes without saying.
Again, we have a lot of open APIs. We have adapters into part of the RASCO MACE. We provide the Icon technology, which is enable you to load feeds from other applications. We support open APIs like Kafka and others in order to feed additional big data as assurance and probing is a key data source in order to monitor the customer experience and the same data could be used by other telecom applications for customer care, business analytics and more. So definitely, integration is part of our day to day.
And this is part of the value of moving to cloud native environment. And with using microservices approach in some areas, this is even easier.
Great. Thanks. Good rundown on the technology. I wanted to go back to the pipeline conversation and sort of the time line. When you win a transaction, obviously, there's some pretty big lag between the time you win a transaction and the time it actually shows up as revenues.
I would assume that there with most of these native 5 gs deployments that from the time you win to the times you have actually done the installation, done the quality checks and other deliverables, that could be a fairly lengthy time. Can you talk about how long it takes to go from closing a deal to recognizing revenue in 5 gs? Is it the same as it was in the 4 gs world?
We are talking about usually 2 to 3 quarters until we start to see the revenue in the typical case. I would say this is a bit faster than the 4 gs as 4 gs in many cases was involved hardware implementations. And once we are doing it on 5 gs using the visualization software, we shortened some of the time required for the to start the project. So we start the project earlier, but there is some work around integration that in the typical case takes 2, 3 quarters until we start to see the revenue.
Okay. And then one more question along that same lines. Can you talk us through where you are and where you expect to be in terms of the percentage of your business that is subscriptionrecurring and therefore highly visible? And what portion of your business is still on more returns or lumpy kind of installation and revenue recognition model? And where do you think it will be, say, a year from now or 2 years from now?
So we already did the big shift in our business model towards the multiyear engagements. And most of our wins in the recent years are already structured in a recurrent base on the multiyear level. I would say that significant part of our revenue is already structured in this way and only a smaller part is on a onetime revenue. I expect this trend to continue, but I would say that we are already well down deployed as Part of the benefit of InfuNet is the software product is that you are not requiring to do one time upfront investment, but you can spread the investment over the terms of the contract. And as I said, this is our preferred business model in the recent years and majority of our revenue is already structured like that.
I expect this to continue as more and more operators are moving to 5 gs and selecting this business model. But with that being said, there might be some onetime projects or revenue sources as we still see that some telcos insist on getting the traditional business model. And as we are working with Tier 1s, we are not going to lose the deal in order to if the customer insists. So we are trying to find the right model defaults for both the customer and us. And there are some specific projects that are really one off like one time license or one time requirement that is still there.
But overall, the trend is definitely towards a return to revenue.
Is it fair to say that you're 75%, 80% recurring at this point?
I don't have the exact number. And again, it's not something I'd say, but I'd say the ballpark range is around there.
Perfect. I'll ask you the floor. Thanks.
The next question is from Sasha Karim of IPI. Please go ahead.
Hi. I've got a couple of questions. My line cut out towards the end of the last question. I don't know, were you giving some guidance there on roughly what's the model for the new LatAm contract? Can you give us any view on whether it's sort of more like a quarterly SaaS type revenue recognition or an annual revenue recognition?
And how would it size relative to, for example, the recruiting contracts if it was a full year contribution?
Hi, good morning. So we didn't touch the LATAM contract. The LATAM contract, as we stated, is currently covering a specific part of the network of this operator with additional potential to expanding into a multiyear once the operators continue with the expansion to 5 gs. This is expected to be not quarterly basis, but like more one time a year. And currently, we engaged on the first part of the contract.
We got the orders for the first part with exceptions to further expense while the operators is progressing with this transition into 5 gs.
Great. Thank you. And then my next question would be regarding the Azure deal, the Azure partnership. Would you say that the larger Tier 1 operators are less likely to be willing to partner with a hyperscale cloud provider like Microsoft because it sort of risks they risk becoming very dependent on it and they have the capability of running their own cloud. So is this more an opportunity for you to win perhaps some of the Tier 2, Tier 3s that you wouldn't ordinarily gone for, but now you can go to the Tier 1s and the Tier 2s and Tier 3s?
So I think it's the we see this trend of starting to partner with the cloud providers, not only from the Tier 2s, but also from the Tier 1s. If in the past, what Tier 1 operator would do is build his own cloud. We see more and more Tier 1 operators partnering with the cloud providers in order to help them to build the data centers and the private cloud environment. As they understand, this is not their core competence. So this relationship with the cloud providers is not targeting only for the Tier 2.
It's definitely also targeting to help us with the penetration in the Tier 1. But you are rightly saying that it's allow us also access to some of the Tier 2 Tier that are starting to migrate also to more advanced capabilities. This is part of the maturity of the market that we see that other advanced Tier 2 operators are also starting to adopt those architectures.
And finally, Microsoft does have some vertical specific software expertise here through its acquisition of Affirmed Networks. I appreciate right now Microsoft is a partner, but what is the risk that through that firm's acquisition, they could eventually move into more deeper Assurance and become a competitor?
I don't have any visibility into what Microsoft are telling, but I believe that insurance is an area with the you need a specialty of that I don't see that they currently have and necessarily looking to invest. But again, I don't have any visibility into what they are doing. It could be that they are going into this direction. But in this case, we believe that integrations with best of breed solutions might be a better approach for most carriers and cloud providers.
Great. Thank you.