Ladies and gentlemen, thank you for standing by. Welcome to the MedCon RCD Results Conference Call for the Q2 of 2020. All participants are in a listen only mode. Following management's formal presentation, instructions are given for the question and answer As a reminder, this conference is being recorded and will be available for replay from the company's website at www.ratcom.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 yet downloaded it, you may do so through the link on the Investors section of Radcom's website at www.vacom.com/mecorrelations. Before we begin, I would like to review the C4 provision. Forward looking statements in the conference call involve several risks and uncertainties, including but not limited to, the company's statements about its investment in technology and R and D, the expected transition to and rollout of 5 gs networks and other trends in the communication market and customers' level of investment in their networks, the company's market position and leadership the company's execution of its commitment to existing and future customers and potential growth the potential of the Radcom based product the resiliency of the telecom market company's expectation to be well positioned to handle uncertainties and other impacts due to COVID-nineteen, its revenue guidance and anticipated growth margins.
The company does not undertake to update forward looking statements. All safe harbor provisions, including risks and uncertainties, and actual results to differ from these forward looking statements are outlined in the publication in the company's SEC filings. In this conference call, management will be referring to certain non GAAP financial measures, which are provided to enhance users' overall understanding of the company's financial performance. By excluding certain non cash stock and compensation expenses, non GAAP results provide information that is useful in assessing Radcom's core operating performance and in evaluating and comparing our results and operations consistently from period to period. The presentation on this additional information is not meant to be considered as such as 24, the corresponding financial measures compared in accordance with generally accepted accounting principles.
Investors are encouraged to review the reconciliations of GAAP to non GAAP financial measures, which are included in the quarter's earnings release, which is available on our website. I would like to repeat the information about the presentation. If you have not downloaded it yet, you may choose to see the link on the Investors section of Radcom's website at www.radcom.com/investorcashrelations. Now, I'd like to turn the call over 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 Q2 results for 2020. We are pleased with our Q2 financial performance, which was in line with our full year growth plans as we increased revenue, continued to invest in R and D and improved our bottom line. As you may have seen, total revenue for the Q2 of 2020 were $2,200,000 and we remained on track to achieve our growth plans for 2020. Based on the current industry conditions and our visibility, we are reaffirming our full year 2020 revenue guidance range of $35,000,000 to $38,000,000 Although the full impact of COVID-nineteen is still uncertain, we remain confident that the telecom industry will continue to prove resilient through this pandemic, especially rely on telcos to keep business connected and federal is maintained in the era of social distancing and lockdowns.
We expect that 5 gs will continue to incrementally ramp up in the later part of 2020 and during 2021. We view this operator transformation as a key opportunity for Radcom that we are well positioned to take advantage of as the market evolves. At the beginning of August, there were already 92 commercial 5 gs networks worldwide. We see deployments progress and the telecom industry move forward despite the challenges of COVID-nineteen. In the U.
S, AT and T recently announced that its 5 gs network was available nationwide, which is powered by its network cloud, enabling cost savings and innovation at speed. We continue to have healthy relationship with AT and T as we deliver cutting edge software releases and provide support for evolution of the cloud network. In Japan, Rakuten launched full commercial 4 gs services in April and already announced that they plan to launch 5 gs next month. Rakuten is moving fast with its cloud platform, which has already been packaged to sell other operators and enterprise in Japan and worldwide. Network transformations are multistage process and we are currently at the early stage where operators have selected their network equipment providers.
Some operators have started to move to the next step and roll out services. Still, once operators begin to deploy advanced use cases over 5 gs, assurance vendors will be evaluated and then selected. In these 5 gs networks, operators will need to update their existing service assurance solutions to cloud native solutions as they will require proactive real time insights and dynamic solutions. We are starting to see initial customer requirement requests for next generation capabilities and cloud based features as operators begin to plan for insurance vendor selection. We are excited to have announced the launch of RadcomASE last week, our new automated assurance solution for 5 gs.
This announcement is a significant milestone in our multiyear journey that started with the transition to virtualization. I'm proud of the team's accomplishment in reaching this critical milestone to position us well
as the
leading assurance solution for 5 gs. Radcom ACE is the outcome of our vision to provide operators with the automated assurance solution for 5 gs. Radcom's innovative software will automatically monitor the operator services, fix some critical issues and help resolve them. Ashering the new paradigm for issuance capabilities, Radcom Ace will help operators accelerate their network transformations by continually monitor the customer experience and provide tools to rapidly optimize the network to ensure smooth integration for an operator's customers to 5 gs. Combining cloud native technologies with cutting edge artificial intelligence and machine learning to deliver real time network intelligence, Latromace significantly reduced the total cost of ownership for Assurance.
This is provided by creating expense saving for operator through the automated optimization of the network as well as decreased CapEx requirement through our containerized software efficiency and cloud native capabilities. In bringing Radcom ace to the market, we took advantage of our use of cloud native expertise as well as our close working relationship with some of the leading telecom operators in the industry today to design a solution for 5 gs and the advanced use case of the future. Currently, we are involved in multiple 5 gs opportunities and trials at selected customers. We believe that Radcom ACE answers the needs of operators for automated assurance solutions and are ready to deliver Radcom ACE to operators as they move forward with their assurance investments. We are pleased with our 2nd quarter performance as we continue to execute on our plans and invest in R and D to support our customers' needs.
The transformation to 5 gs is a key opportunity for Radcom that we are well positioned to take advantage of as more and more operators make their transition. Given our engagement with industry leading customers on cutting edge projects that utilize our cloud native solutions, we are in a strong position to benefit from this network transformation. With that, I would like to turn the call over to Amir Hai, our CFO, who will discuss the financial results and details. Hamir, please go ahead.
Thank you, Eyal, and good morning, everyone. In this quarter, we maintained revenue growth and spread over with healthy gross margins as well as reduction in operational expenses, mainly due to COVID-nineteen and as a result, 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 Q2 of 2020 with revenue of $9,200,000 an increase from $8,500,000 in the Q2 of 2019.
Our gross margin on a GAAP and non GAAP basis was 77% in the Q2 of 2020. We expect full year non GAAP gross margin to be at a similar level as previous year. Please note that our gross margin can fluctuate depending on the product mix. Our gross R and D expenses for the Q2 of 2020 on a non GAAP basis were $4,500,000 a slight increase of $100,000 compared to the Q2 of 2019. During the quarter, we received grants from the Israel Innovation Authority for the first half of twenty twenty for $572,000 Sales and marketing expenses for the Q2 of 2020 were $2,200,000 on a non GAAP basis compared to $2,400,000 in the Q2 of 2019.
The decrease is mainly related to reduction in travel expenses due to COVID-nineteen. G and A expenses for the Q2 of 2020 a non GAAP basis were $804,000 compared to $754,000 in the Q2 of 2019. Operating income on a non GAAP basis for the Q2 of 2020 was $102,000 compared to an operating loss of $715,000 for the Q2 of 2019. On a GAAP basis, as you can see on slide 5, our net loss for the Q2 for 2020 was $200,000 or a net loss of $0.01 per diluted share compared to a net loss of $900,000 or a net loss of $0.07 per diluted share for the Q2 of 2019. Net income for the Q2 of 2020 on a non GAAP basis was $200,000 or net income of $0.02 per diluted share compared to a net loss of $400,000 or a net loss of $0.03 per diluted share for the Q2 of 2019.
At the end of the Q2, our headcount was $273 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 Q2 of 2020 was $66,000,000 We believe that our strong balance sheet provides us with the flexibility to execute the opportunity ahead of us and adapt the ongoing global uncertainty. 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. The first question is from Alex Henderson of Needham and Company. Please go ahead.
Congratulations on turning a profit in the quarter. It's quite an achievement. A couple of simple questions. The commentary on the NRE, it sounds like you are expecting roughly $500,000,000 in NRE for the year now. Is that a reasonable conclusion?
Hi, Alex. I will tell you this call is Samir. Basically, we received an approval from the Israeli Innovation Authorities $1,300,000 for all the 2020. So the half of year we recognize an income of 5.70,000,000 the rest will be in the second half of year.
I see. Okay. And then given the very strong results in the quarter, obviously, your gross margin was heavily skewed to the software mix. Are you expecting the margins in the back half to revert back towards the 70% level? Is that a reasonable expectation?
I would say that also. Yes, it's a reasonable expectation. As you see in the last quarter, the gross margin was around 63% and in average, it's around 70%. And I think basically when we look at the year end and take it annually, this will be approximately the gross margin between the 70% to 72% or 73%.
All right. So under that scenario it doesn't sound like although you were top up profitability here that we should be expecting profitability again in the back half more like breakevenish type numbers?
Yes. Basically our global expenses on a nano basis is around $40,000,000 So on the of course, is some cost savings regarding the COVID-nineteen. But give or take, this is the number that we will be breakeven at.
And then just wanted to talk
a little bit about
the trajectory in the back half on expenses. Could you remind us, given the shekel has had a big very steep decline over the March, April timeframe and then completely rebounded, How does that impact you guys numbers?
It has an impact, but the shekel is trading between we can see the Q2 of 2020 is trading between 3.4 to 3.5. This is the range that we are looking at and this is the range that basically was taken in our assumptions regarding the expenses.
Were you able to take any advantage of that decline or is that was that already locked in?
It's locked in. Basically it was in Q1 most of it and it's locked in.
I see. Okay. And then just on the technology side, if I could. Obviously, this is a pretty big news event with the ACE product. We love cloud native architectures and there are really significant improvements in design.
So as we look at that, the question comes up actually, it's 2 questions related. 1, does it change the timeline for evaluations from potential customers because they're now looking at a different architecture than what they had been looking at before? And 2, does it accelerate is it reasonable to think that people will be accelerating this transition to a cloud native architecture or will you be carrying both the traditional architecture and the cloud native architecture? How do we think about the adoption pattern given this major new product announcement?
So first of all, good morning, Alex. I think it's definitely an exciting time for us. And we are very pleased with this critical milestone of launching the RascomASE, which is a very advanced cloud native containerized architecture product. This is an outcome of hard work of multiple years and it's part of our long term strategy to focus on the 5 gs market and its needs. It's aligned with our plans in a way that we talked in the previous calls that 5 gs is about to start, I mean, in the service assurance space, 2nd part of 2020 and primarily in 2021, while the market is expecting to get to peak in 2022, 2023.
So I think it's a great timing. We are now in really the very early adaptive stage when we start to see the 1st step operators globally announcing they are moving to the next stage with their 5 gs networks and starting to invest in their 5 gs core, which is exactly the indication that they should follow by investments on service assurance solution. While you're going to those 5 gs implementation including the 5 gs core and building it on the cloud data technology which is consensus these days, you will not be longer be able to use the previous architectures. You need something new that is containerized, that is built to the 5 gs requirements. And this is why we were busy in the last few years to make sure we are ready on time and we are very pleased that we made this milestone.
Now, with regards to your question in terms of the timing of the investment, I think this is in line with the operators' readiness on selections of tools. I would say that from initial trials we were doing and we just launched it last week, so but we already introduced this technology to some of our selected customers and the feedback is very exciting. So we believe that it's going to be in line with the plan. Some operators are still looking on 4 gs and still looking on virtualization technology of the current stage, I would say. But the early adopters of 5 gs are moving already to this cloud architecture.
So having both solution and I would say this complements our current stack and allow operators to have end to end visibility into his 4 gs and 5 gs network whether he is using the software technology or to the cloud native latest and greatest architecture that operates ourselves remotely today?
I'm pretty sure I know the answer to this, but is the competition able to deliver a cloud based architecture or are they still well aligned you guys? And I'll see the floor after that.
Yes. We believe that our deep knowledge on virtualization being engaged with the top carriers doing virtualization in the last 4, 5 years, giving us a clear advantage in this space. We were waiting for the virtualization technology to start the pickup pace and we are very excited that in 5 gs everything is going to be virtualized. So we believe our big experience including the very large scalable implementation in utilization is going to come to play once we are starting to implement 5 gs. So yes, it's definitely an advantage for us.
Great. Thank you very much.
The next question is from Matt Stottler of William Blair. Please go ahead.
Hey, guys. Congrats on the results and thank you for taking my questions. I guess, first, I'd like to start with, obviously the results were better
than expected in the quarter, it was
good to see. Could you maybe just quantify or speak to what you're seeing in terms of the ongoing impacts of COVID on customer spending or customer conversations in the quarter and any change or how those how that behavior evolved as you kind of move from a March, April timeframe through May and into June July?
Yes.
COVID-nineteen has an effect of course in Q2 and we mentioned it in a couple of $100,000 in this quarter. Basically the saving were in the travel expenses and of course the offering expenses and conferences and etcetera. Moving forward and due to the reality that we are facing, we don't see any increase and we believe that we can keep the saving going forward most of the saving going forward in the second half of the year.
Maybe adding to that, Matt, if we take the market perspective, overall, the telecom is continue with its plans to migrate to 5 gs. We are seeing more and more operators taking the decision and starting to invest in the 5 gs radio frequencies. As mentioned, 92 carriers already announced they are starting to launch initial 5 gs implementations. We are seeing that despite the COVID-nineteen, the transformation to 5 gs continues. Overall, it is going as planned.
So we don't see any significant effect. And we are happy to see that the journey to 5 gs is strategic to the circles. And they feel this is something we need to continue and implement. And we actually see some acceleration in some operators in terms of the 5 gs implementation, which is very encouraging. Obviously, the full effect of the COVID-nineteen and the overall atmosphere is not is making telcos investment and long term projects in some risk.
But from what we see today, we are seeing very positive signs on the investment in 5 gs.
Right. That's good to hear. And then obviously the revenue result was better than expected in the quarter. Full year guidance reiterated about 11% growth, a good point. Obviously, there's still some inherent lack of visibility just given the environment that we're all operating in.
But can you just refresh us on the assumptions that you're making into your projections?
So our as we reiterated, we are still confident with our guidance of $35,000,000 to $38,000,000 We are happy to continue and execute our plans and looking on a growth year. We are now in August, so there is still few months to go to complete the year. But we have very good visibility already with the contracts we have, with engagements we have, which allow us to reaffirm this guidance. We are very busy these days already to continue and build and increase the pipeline for 2021. As we know, pelos opportunity in our space are long term processes and we are feeling confident on the year, but already busy building next year's pipeline.
So overall, it's a mix of existing customer, extensions with existing customer and penetrating into new accounts that is mainly targeted to revenue of 2021.
Right, right. That's helpful. And busy is obviously very good. One question to follow-up on the Radcom ACE announcement. It was obviously due to see this release last week.
You mentioned a number of kind of early trials ongoing. How should we be thinking about kind of time to revenue contribution for these solutions or for the solution and kind of your expectation for what the trial period might look like or how to think about how this rolls into revenue in the back half of this year and into 2021 would be helpful.
So we commented all along that the timeline for the 5 gs assurance solution is likely to be late in 2020 and primarily in 2021. So this year is mainly about building the engagements, releasing the product that we are very excited to release and securing our contracts towards 2021. So our 2020 numbers are still without any upside from the 5 gs, But things could happen and accelerate also the results. Exact timing is obviously uncertain. It seems to be fairly or a bit later.
But I would say that as analysts predict, the early adopters will select solutions in the next 6 to 12 months. And this is something that we want to take out of. We have the privilege to be working with some of the most advanced carriers that are embedded in 5 gs. And we want to leverage our experience in virtualization and our ability to deliver those these exciting technology to take part of those early adapters deals. Obviously, from time we will window deals until it goes to the revenue, there is some few more months.
So this is why it's likely more to happen in the to affect the part of our 2021 revenue.
Right. Very helpful. Thank you. Just a couple of quick additional questions from me. Rakuten obviously launched in the 4 gs network in April, as you mentioned, expect to launch 5 gs next month.
Any so in terms of what that contract looks like as they move to 5 gs, is that tailwind to revenue for you, that customer? Is that should we expect that to increase your revenue opportunity to that customer? Or should we expect that to be kind of flattish for the remaining quarter?
So 5 gs has reduced an upside on most of our customers as this newly launched product is not something that anyone already purchased. So any new deal for 5 gs would be an upside on top of the revenue stream we get from our accounts. And this is why moving forward 5 gs brings an opportunity, but it's also primarily an opportunity to penetrate to new accounts that are currently evaluating what is who is the right partner for them to the 5 gs era.
Right. Got it. And then last one for me would just be any update on AT and T. You mentioned they rolled out their 5 gs coverage in the U. S.
Over the summer, something you talked about last quarter as well. Just any update on progress of that customer and any expansion opportunities that you're seeing going forward?
So as mentioned, I can see like others without getting into specifics is busy and definitely very vocal about 5 gs plans and they are part of our target audience for this platform. And I think this is really where our technology advances will come to play. We obviously used a lot of the inputs of our existing customers in order to build and design our new 5 gs solution. And we are excited to have it launched and start to work with both again new customers and our existing customers moving forward into implementations of these technologies in their network. I still want to reiterate that while we see operator announce their 5 gs and their 5 gs investment and some even nationwide, most of them are still in a very early stage in their 5 gs investment, primarily focused on the radio side.
And just I think this quarter we saw first announcement of selecting the vendors for their 5 gs core, which is the main driver for investment in insurance. So we are seeing progress, but we need to understand where are we in the timeline. We are now moving to the next step, but there is still time until we would see implementations of service assurance solutions in 5 gs. It's as I indicated, it's expected to happen late in 2020, primarily in 2021.
Got it. Very helpful. Thanks again for taking my questions. Sure.
The next question is from Hawa Harvitz with OSP. Please go ahead.
Hi, very nice quarter. Thank you. I was wondering about the cash. How much of the cash increase for the quarter came from free cash flow? And how much came from, I guess, government grant, if any?
Most of the cash increase was due to the free cash flow.
Okay. Wonderful. I was wondering, Eyal, if you could characterize over the next 6 to 12 months, what size of potential book of business for Radcom is there? As you said in the call that you see at the end of 2020 that they're going to start to open up in terms of 5 gs. I'm wondering what does this mean in terms of versus what you have now, what does that mean for Radcom?
And are there expectations that you would penetrate a certain percent of that market over the next 6 to 12 months?
So I think that Radcom as of today is still have a lot of potential of growth within the market. We are looking on the telecom industry and there are very few to none selections of 5 gs assurance providers worldwide. So the market opportunity is ahead of us. But as we know, telecom industries and the action process and new technology adoption takes time and it's not something that everything will happen over the next few quarters. It's a journey that we are we started a year ago in terms of 5 gs and we are expecting to continue in the next few years to come.
I believe that we have great opportunity both with our existing customers and with potential new customers. The rate of adoption is really dependent on the selection process of different operators and it's very hard to predict. But the advantage of Brascom is that every new win and every new expansion would be a very significant upside on our revenue numbers. So it's still something that we are monitoring and anticipating. And once we get closer to end of 2020, we are expecting to have visibility into 2021 and we will share our guidance
then. Is there a way for you to can you tell us how many deals potential deals are in the pipeline today versus a quarter ago? Are you seeing that build right now? Or is it too early to see a build?
It's not information that we are sharing, but I would just say that we are seeing good indications overall on 5 gs market maturing up, both coming from the announcement of the operators and the figures we are getting from the customer and from the market about where they are and about our technology. So overall, we are seeing positive progress towards demand and it's aligned with what we expected to happen when we planned 2020. It's very positive in light of the COVID-nineteen, which we know in some industries and some companies are reporting slowdown. We don't see any slowdown, which is very, very good indication. And I think the overall most important part is that the journey to 5 gs continues.
The virtualization and cloud native is a consensus. This is exactly where we excel. This is where we invested all of our technology. And we believe we are well positioned now to address this market.
Okay. Thank you. Final question. Anybody who's launching 5 gs, must they have a solution similar to Radcom or Radcom solution itself in order for that 5 gs network to
be launched? Must they have
something like RADCOM in place?
So, yes, yes. So, if you launch your radio, if you launch your 5 gs, as I mentioned, if you invest most operators start with investment only on the radio side and they still use their 4 gs network call in order to support this new radio connection. This is the stage we are as an industry. But once they move to the next stage of 5 gs after the initial launch and want to go more strategically with that, they need to upgrade their network code. In this stage, most of the carriers, a very big vast majority of the carrier will select a solution of service assurance in order to assure that they get visibility.
Otherwise, they are transparent towards winning the network and it will be very hard to support the launch, very hard to maintain the customer experience. This is why, as I mentioned, this market opportunity is still ahead of us.
Okay. So it's not a matter of if, but rather when really because at some point they will have to transition to something like a Radcom system?
Exactly. Okay. Thanks very much and thank you for the quarter. Thank you.
There are no further questions at this time. This concludes Radcom Ltd. 2nd quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.