Ladies and gentlemen, thank you for standing by. Welcome to the Radcom Ltd. Results Conference Call for the Q3 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.
As a reminder, this conference is being recorded and will be available for replay from 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 atwww.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 expected transition to and rollout of 5 gs 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 contracts with Rakuten and continued relationship with AT and T the potential of Radcom's EASE product the company's expectations regarding the impact of COVID-nineteen 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 that is useful in assessing Radcom's core operating performance and evaluating and comparing results of operations consistently from period to period.
The presentation of this initial information is not meant to be considered a substitute for the corresponding financial measures prepared in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliations of GAAP to non GAAP financial measures, which are included in the the earnings release, which is available on our website. I would like to repeat the information about the presentation. If you have not downloaded it yet, you may do so through the link on the Investors section of Radcom's website at www.radcom.com/investor relations. Now, I would like to turn over the call to Iyam.
Please go ahead.
Thank you, operator, and thank you all for joining us today. Earlier this morning, we issued a press release stating our Q3 results for 2020. We are pleased with the results as we continue to execute against our full year growth plans in the Q3, which was highlighted by increased revenue and an improved bottom line. As you may have seen, total revenue for the Q3 of 2020 was $9,800,000 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 $35,000,000 to 38,000,000 dollars We continue to strengthen our position as the leading 5 gs assurance provider in the Q3, while meeting our financial goals. We believe the R and D investments 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 5 gs assurance contract win that is one of the industry's first standalone 5 gs assurance contracts. This is an additional multi year agreement with Rakuten Mobile to ensure their 5 gs network with our 5 gs assurance and analytics solution, Radcom Ace, launched in August. Rakuten has selected our solution for its non standalone 5 gs service launched in September and its standalone 5 gs 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 migrating Rakuten's customers to the new 5 gs network and onboarding new customers.
This selection represents a significant milestone along our 5 gs journey. It is also an acknowledgment of Radcom leadership as a 5 gs assurance vendor and is the result of our focused investment in R and D and product innovation. Additionally, we continue to support Rakuten's existing 4 gs 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 4 gs network, Rakuten launched its 5 gs mobile service. We are excited to continue our partnership as Rakuten expands its coverage.
In the U. S, we continue to deliver cutting edge software releases for AT and T and provide support for the initial evolution of its cloud network that backs its nationwide 5 gs rollout. Last month, Ookla ranked AT and T number 1 for having the fastest nationwide 5 gs network as it's continued its emphasis on high quality network to deliver connectivity to businesses and consumers alike. Our work with world leading customers such as Rakuten and AT and T provide us with invaluable experience and knowledge that can prove to be vital as operators transition to 5 gs. Currently, we are involved in multiple 5 gs opportunities and trials at various stages at selected customers.
The expertise we have built along with our continuous technology enhancements position us well for the evolving market. The telecom industry has been robust throughout the Q3 as connectivity proved vital following global lockdowns. Businesses and families continue to rely heavily on high quality network performance for managing day to day life even as restriction eased. As a result, our customers' 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-nineteen social distancing restrictions.
While we focused on delivering on our customer commitments, we also ensured our employees, vendors and customers' health and safety. With working from home and virtual interactions, the new norm, we believe technology trends that they rely on 5 gs are priority for more and more operators. 5 gs 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. 5 gs rollouts are multistage process, which operators choosing their network equipment provider first, then evaluating 5 gs assurance solutions as the technology continues to roll out. We consider this 5 gs contract with Rakuten Mobile and other current customer engagements and trials as a good sign that the 5 gs 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 new opportunities for us and that we are well positioned to capitalize on this with our innovative solution Radcomaes. Based on the latest 5 gs market status reports from the GSA at the beginning of October, there were already over 100 5 gs networks worldwide. This compares to 60 5 gs networks at the beginning of 2020. The same 5 gs report states that the overall more than 397 operators are currently investing in 5 gs.
This includes trials, acquisition of licenses and network planning. So we are encouraged by the industry's advancements in 5 gs. Some operators have been waiting for more 5 gs devices to be commercially available before launching 5 gs services. We saw in the Q3 the number of commercially available devices almost doubling. In October, Apple held a virtual event under the slogan high speed in which they highlighted the benefit that 5 gs has to offer.
That means that if consumers buy a new iPhone 12, it will be 5 gs enabled. As a harbinger of mainstream technology adoption, we believe that Apple's entrance into the 5 gs market sends a strong signal that the 5 gs revolution is underway and evolving. Expect initial 5 gs investment and solution evaluations for early adapters to ramp up into 2021. So far, the customer feedback we have received for the RASCOM ACE has been very positive. Radcom ace is fully cloud native, designed for the new 5 gs network architecture and has built in AI and machine learning capabilities to deliver automatic real time insights for operators to ensure a superior 5 gs customer experience.
We believe that Eradcom Ace is the most advanced solution for automated assurance and it's differentiated by its capabilities, which position us very well to capture market share as more operator transition to 5 gs and select their 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, Iyan, and good morning, everyone. This quarter, we continued to grow revenues with healthy gross margins and benefit from COVID-nineteen 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 Q3 of 2020 with revenues of $9,800,000 an increase from $9,400,000 for in the Q3 of 2019.
On a GAAP and non GAAP basis, our gross margin was 76% in the Q3 of 2020. We expect full year non GAAP gross margin to be at the similar levels as previous year. Please note that our gross margin can fluctuate depending on the product mix. Our gross R and D expenses for the 3rd quarter of 2020 on a non GAAP basis were $4,600,000 a slight increase of $100,000 compared to the Q3 of 2019. During the quarter, we received grant from the Israel Innovation Authority for $478,000 Sales and marketing expenses for the Q3 of 2020 were $2,300,000 on a non GAAP basis compared to $2,600,000 in the first quarter of 2019.
The decrease is mainly related to a reduction in travel expenses due to COVID-nineteen. G and A expenses for the Q1 of 2020 on a non GAAP basis were $798,000 compared to $812,000 in the Q1 of 2019. Operating income on a non GAAP basis for the Q3 of 2020 was $239,000 compared to an operating loss of $1,200,000 for the Q3 of 2019. Net income for the Q3 of 2020 on a non GAAP basis was 200 and $46,000 or a net income of $0.02 per diluted share compared to a net loss of $988,000 or a net loss of 0 point 0 $7 per diluted share $7 per diluted share for the Q3 of 2019. On a GAAP basis, as you can see on Slide 5, our net loss for the Q3 of 2020 was $442,000 or a net loss of $0.03 per diluted share.
This compared to a net loss of $1,700,000 or a net loss of $0.12 per diluted share for the Q3 of 2019. At the end of the Q3 of 2020, our headcount was 2 78. 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 Q3 of 2020 were $65,000,000 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's end our prepared remarks.
I will now turn back the call to the operator for your questions.
Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer 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 could give us your sense of how challenging it was to execute it 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?
Hi, Alex. Good morning. I think that we are now already starting to get used to this new normal. While definitely COVID-nineteen had some restrictions and travel is very limited, we really adopt the company for working for remote. 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 connectivity from remote.
It doesn't require everyone as 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 on-site meetings and in some area it had some difficulties.
But overall, I think we are very proud of the team and the overall execution as you can see in the result is quite positive.
Looking at the pipeline of activity that you've pulled in and the obviously good success with Aragatam and AT and T, Is it reasonable to think at this point that you will expect some additional contracts to help drive continued growth in 2021? 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 newly launched Radcom ACE, our new cloud native 5 gs assurance solution. And as I pointed, the message we get is very positive. There is an increased number of operators that are starting to invest in 5 gs, 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 5 gs. 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 5 gs. For many of us, it won't be relevant. Now the iPhones the new iPhones are coming and the demand from the customers for 5 gs will increase. And I believe this would drive forward the operators investment into 5 gs. So we are definitely seeing that there are more opportunities that could raise in the next months.
And the COVID-nineteen is adding complexity, but it's not that the market is not moving forward. It definitely moves forward and there are a lot of indications 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 they decelerated the rate of deployment because of I think a little bit of a overly aggressive strategy causing some issues on their deployment or are we now past all of that and they're reaccelerating things?
So without getting to Rakuten confidential and specifics, I think the one thing you cannot say about Rakuten that they are de accelerating. Rakuten just launched their 5 gs network last month. This is only 6 months after commercial launch of their 4 gs network. I think this is record speed for any operator. They'll continue pursuing innovation and we are working with them on multiple tracks and this contract is a great sign, probably one of the first operators to commit on the 5 gs standalone assurance, which is the 5 gs longer term that they are expecting to launch in June 2021.
So activities are very high with Rakuten and they are continuing to invest full power and they are fully committed to the 5 gs. And we are very active with them, both on the current 4 gs agreement and the new 5 gs implementation that is starting with the network that was just launched for the non standalone and activities to make sure that they are launching a high quality network for the standalone mid-twenty 21.
One last question, then I'll see the floor. The competitive landscape, it's been a while brewing to get to these 5 gs 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 facilities is great that they appreciate our technology. I think the in-depth of our virtualization expertise is shown. And while you are looking on 5 gs, virtualization is a consensus. No one is implementing using proprietary hardware and in your 5 gs build. So while I believe if before we were working in the virtualization that was a niche in the 4 gs for 5 gs this is a center stage.
All 5 gs 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 this space. We didn't see anything significant from competitors so far, but I'm sure that competitors are also looking on the 5 gs opportunity because most of the carriers today are in a stage that starting to look into the assurance solution. They are looking on their 5 gs network. Some of the early adopters like Rakuten already closing the agreements. Some it will take a couple of years.
But 5 gs is where everyone is targeting. So competition is eyeing also in this space, but we believe our technology, some of it is patented, is going to be positioned us very well in those opportunities.
Great. I'll cede the floor. I look forward to seeing you next week. I understand you have a very packed schedule, so we look forward to that. Thanks.
Thank you, Alex.
The next question is from Matt Statler 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 racketsan question in a different way. So you've talked about kind of moving pieces here, you're supporting the 4 gs network. Obviously, they had a limited 5 gs launch last month and are planning that 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 and how it's 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, is very, very important milestone in the 5 gs space, but it is also a multi $1,000,000 deal that is going to be spread over the multi year agreement. It's cement our partnership with Rakuten and it's increased our visibility to 2021 as a 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 a healthy relationship and we continue to work with Rakuten on different innovations. But for sure, the 5 gs agreement is very strategic for us as being one of the first, if not the first contract for 5 gs automated assurance in our market. We see this not only as the multimillion dollar deal that is significant for us, but also on the partnership that we continue, first of all, is a proof of our technology, but also 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 gives us a lead position if those opportunities will evolve. So there is currently the activity we are doing with them is in Japan. If and when Rakuten will be able to expand above 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 of POCs 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 POCs 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, I would say, an overall increase in the 5 gs environment. It's an increase that is becoming because of the 5 gs market is getting the momentum. We were waiting for the 5 gs to mature and for operator to take a more serious investment in this space. And I believe also that the time passed between operator inventing on their 4 gs till now that their 4 gs incumbent solution are getting in some cases outdated make operator more open to look into investment in 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 it to continue while more and more operators will start to invest in the 5 gs network and then we'll need new 5 gs 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 5 gs adoption, we're kind of on this 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 do 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 and 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 and D level is currently similar to as you could see in the last couple of quarters. We are now starting our work and then meetings for 2021 and budgeting.
And please be patient for 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 and D because we have a very sizable technology group that and the 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 or 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 4 gs with Rakuten and we have the contract for the 5 gs. So this is our life and we used to it. We are working closely with our customers to make sure they are satisfied from our services and appreciate our technology.
And you can say in general that in every given year you have a portion that is required renewal.
Got it. Thanks for taking my questions.
Thank you, Matt.
The next question is from Abba Horowitz of Old School Partners. Please go ahead.
Hi, good afternoon. Hi, Abba. I was wondering if you could talk about the R and D first. At what point do you think that the R and D is going to stop, that there will be less of a need to invest in that forward R and D or as a percent of revenues at least that the R and D will stop going up?
So I think that we are not going to stop the R and D investment or decrease it 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 and D percentage wise decreased I think about 4% or 5%. And this is mainly because our revenue growth. We are this year keeping above the same R and D investment while increasing the revenue and by that the percentage is lower. As I mentioned to Matt, we are still working on our work plans, but I would say that we are looking to keep similar levels of R and D also next year and maybe some modest growth, but not something significant while our revenue continue to grow, it means percentage wise, it's going to be a bit low
on. Okay. Because I mean, what I see here is the R and D is your biggest expense. And clearly, if you were to get some revenue growth here and keep that R and 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 and D next year?
Will it be a 14 will it be a $4,500,000 number a quarter? Is that what you're anticipating? Or is it going
to be 5? It's a bit too early because we are now just starting our work plan for next year. But as I pointed, I could say that a good estimate is that we will keep it on a similar level than this year. As you could see that also previously was about similar size. And the reason is because not because we don't see the need for R and D, but because we started the investment 2 years ago or even more because we look forward for the 5 gs opportunity.
And in order to release the Radcom ace on time, we needed to have ahead of time a multiyear investment. And this is something we are looking forward that will pay off now that the 5 gs market started to gain 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 going to be up 20%, 30%. And you're really saying is 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? Or is other deals actually that you're starting to see even now?
So we look forward to end of the year in Q1 of 2021 to see the first deal of around 5 gs. We are happy to the Rakuten agreement. We managed to do it early in Q4, which is ahead of our expectation. And we are continuing to engage both with our existing customer and new opportunities on multiple accounts. We see opportunities in different levels.
It's very hard to estimate the timeline in the telco space because sales cycles are typically long and it could move between quarters. But it's a possibility that we will see also additional deals in the 1st 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 5 gs. The market, the service assurance for the 5 gs 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 5 gs 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 to execute on our opportunities. And we hope that the market positive momentum and investment in 5 gs will continue and customer will mature still 2021 is still the early adapter for 5 gs. If you look on the analyst, we are talking about the trend that is going to be with us in 2021 to probably 2024 and 5 all the investment in 5 gs. So it's going to ramp up.
For us, every win is significant. We are working with multimillion dollar 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 adapters to the main market and then the late adopters may be in less developed areas. I hope this answers your question.
Yes, yes. No, 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?
Yes.
In this quarter, we ended the $65,000,000 In the second quarter, we ended with 66 $1,000,000 So it was a small change. And basically, it's kind of a breakeven. We didn't burn any cash. There was a kind of late payment that we received after the quarter end, about $2,400,000 So this is right. This is the difference.
So next quarter, we should see more like $67,500,000
Depends, depends on the accounting.
Okay.
No, it's contractual at €1,000,000 to €1,000,000 there. It's not symptomatic, yes.
Okay. So last quarter, if
I remember correctly, you generated around $4,000,000 from operations?
Yes.
And this quarter, you generated essentially with those extra money, about $2,500,000 let's say? About $1,500,000,000 1,500,000, 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. We can be less than $1,000,000 we can
be up by $1,000,000 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.
There are no further questions at this time. This concludes the Radcom's Ltd. 3rd quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.