Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. results conference call for the fourth quarter and full year 2019. All participants are present in the listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded and will be available for a replay from the company's website at www.radcom.com from February 14th, 2020. On the call today are Eyal Harari, RADCOM CEO, and Amir Hai, RADCOM CFO. Please note that management's 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 on the investor section of RADCOM's website at www.radcom.com/investor-relations. Before we begin, I would like to review the safe harbor provisions.
Forward-looking statements in the conference call involve several risks and uncertainties, including but not limited to, the company statements about its 2020 revenue guidance, anticipated growth margins, intended expenditures in research and development, the company's strategy, growth, leadership position, opportunities and momentum, visibility, headcount, and backlog, as well as statements about future market conditions and trends, including 5G pace of adoption, benefits and deployment, and future plans of industry participants of customers. The company does not undertake to update forward-looking statements. The full safe harbor provisions, including risks that cause actual results to differ from these forward-looking statements, are outlined 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 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 in evaluating and comparing our results of operation 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 view 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 yet, you may do so through the link on the investor section of RADCOM's website at www.radcom.com/investor-relations. 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 results for the fourth quarter of full year 2019. As you may have seen, total revenue were $9 million for the fourth quarter of 2019, bringing our total revenue for the year to $33 million, which was at the high end of our 2019 revenue guidance. The solid end of the year reflects the progress made during 2019, in which we expanded our customer base into new markets by adding VimpelCom and Rakuten Mobile and maintain strong relationship with our current customers, including AT&T and Globe. Our recent customer engagements are aligned with our strategy of entering multi-year contracts with recurring revenues, which provide us with good visibility into the coming year.
Considering our good visibility into 2020 and the current engagements, we are providing an annual revenue guidance of $35 million-$38 million. Heading into 2020, we believe that 5G revolution has begun as more operators are beginning to launch their commercial 5G services, and we are continuing our work to make sure that RADCOM is in position to benefit from this technological transformation. As 5G sets out to be such transformative technology, I would like to spend a few moments explaining about this technology and the expected stages of its rollout. In initial 5G rollouts, compatible handsets connects to both 5G and 4G radios that in turn connect the subscriber to the same existing 4G core network. Today, we are at this stage of 5G, also known as first phase of 5G, and we see more and more of these limited scope 5G deployments.
Far, just over 60 operators in 30 countries have launched 5G. In this type of mobile network, operators may use their current service assurance solutions to monitor 5G services. Long term, we agree with industry consensus that the fifth generation mobile network is expected to lead the fourth industrial revolution, in which technology is always connected and deeply embedded into society. 5G will seamlessly connect billions of IoT devices while delivering mission-critical communication that is ultra-reliable and low latency, such as remote control of driverless equipment for mining and constructions, as well as remote surgery and fleets of drones connecting to the mobile network for surveys and disaster relief. Later this year, the 2nd phase of 5G standard is expected to be finalized by the 3GPP.
In this network environment, operators will deploy an entirely new network core and will need a new assurance solution to monitor mission-critical, always-connected services. In prior iterations of mobile network, low network performance would have meant a dropped call. In the second phase of 5G, low network performance can affect the success of a remote surgery or whether a remote-controlled drone flies safely. This means that RADCOM will be even more essential to operators as they need to know what is happening in the network all the time to monitor mission-critical services delivered using dynamic cloud-native network. Last year, we announced our initial 5G-ready portfolio. This year, we will continue to enhance our solution to answer the needs of our customers in the 5G era.
We expect that R&D expense will continue to be significant part of our operating expense as we maintain our high level of investment in R&D to maintain our technological leadership. We expect that this investment will provide us an advantage as we seek to benefit from the expected increased momentum of 5G migration. We expect 5G adoption to pick up pace over the year, and we want to leverage our position as market leader for virtualized assurance solution to engage with early adopters. As more advanced 5G use cases such as remotely operated equipment and remote surgery are introduced into the network, they will require more advanced assurance capabilities and features that we can offer. During the fourth quarter, we announced that we signed a new multi-year contract with VimpelCom to provide them with our fully virtualized network intelligence solution and assure their end-to-end customer experience across their customer base.
We are making good progress with this implementation and are excited about working with VimpelCom. VimpelCom is a customer-oriented operator in Russia with over 50 million customer under its Beeline brand. Since VimpelCom operates in a competitive environment, the company is relying on our virtualized solution to monitor its services and ensure high level of customer experience while managing costs. Earlier in the year, we signed a high-profile multi-year agreement with Rakuten Mobile to deploy a fully virtualized platform network intelligence solution for Rakuten's unique mobile network, which will be the world's first fully virtualized end-to-end cloud-native mobile network that adopts a 5G system architecture from launch. Rakuten plans to perfect its cloud connectivity platform in Japan and then take the same platform to other markets worldwide. Rakuten's decision to partner with RADCOM demonstrates our industry leadership.
Rakuten Mobile announced that it expects to launch fully commercial services in April of this year. We are proud to be part of this exciting effort. Rakuten's new network architecture allows flexible deployment of new services and lays the groundwork for speedy and straightforward implementation of 5G. We continue to work closely with Rakuten as they prepare for the full commercial launch of the content-rich, customer-driven network. Additionally, we continue to execute on our strategic engagement with AT&T. Our cutting-edge software and support play an important role as AT&T continues to move forward with network virtualization to prepare for their expected nationwide roll-out of 5G. At the end of 2019, AT&T announced they had virtualized 65% of their network and were on target to reach 75% at the end of this year.
I am encouraged by our progress to date and excited by the fact Rakuten is key participant in some of the most exciting network transformation in the industry today. Looking to 2020, we expect a growth year. We plan to continue to invest in R&D to support our customers' needs as they transition to 5G and believe we are well positioned to benefit from the migration to 5G. We expect the roll-out of 5G to spur the adoption of our innovative solutions. With that, I will turn the call over to Amir Hai, our CFO, who will discuss the financial results in detail. Amir, please go ahead.
Thank you, Eyal. Good morning, everyone. Please turn to slide six 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 fourth quarter with sales revenue of $9 million. Our gross margin was 71.3%, represented our average gross margin for the full year of 2019 on a non-GAAP basis. Our gross margin can fluctuate depending upon the level of revenues and revenue mix. Our operating expenses for the quarter on a non-GAAP basis were $7.3 million, the same level in the third quarter of 2019. Our operating expenses are comprised mostly of R&D expenses. Adding the financial income of $0.3 million net of tax expenses, the net loss for the quarter was half a million dollars on a non-GAAP basis.
Revenues for the quarter represent an increase from $4 million in the fourth quarter of 2018. The increase was due to new contracts we announced and related revenue recognized during 2019. Our gross R&D expenses for the quarter on a non-GAAP basis increased to $4.5 million from $3.9 million in the fourth quarter of 2018. The increase is attributable to the investment in R&D required to maintain our technological leadership. R&D expenses for the quarter were approximately the same as in the third quarter of 2019. Also, during the fourth quarter, we received $425,000 from the Israel Innovation Authority, compared to $366,000 in the fourth quarter of 2018. Our net R&D for the quarter was $4.1 million on a non-GAAP basis, compared to $3.5 million in the fourth quarter of 2018.
Sales and marketing expenses for the quarter were $2.5 million on a non-GAAP basis, compared to $2.6 million in the fourth quarter of 2018. G&A expenses for the quarter on a non-GAAP basis were $741,000, compared to $643,000 in the fourth quarter of 2018. Operating loss on a non-GAAP basis for the quarter was $911,000, compared to an operating loss of $4.2 million for the fourth quarter of 2018, and to an operating loss of $1.1 million for the third quarter of 2019. Net loss for the quarter on a non-GAAP basis was $501,000, or a net loss of $0.04 per diluted share, compared to a net loss of $3.7 million, or a net loss of $0.27 per diluted share for the fourth quarter of 2018.
This compared to a net loss of $988,000, or a net loss of $0.07 per diluted share for the fourth quarter of 2019. On a GAAP basis, as you can see on slide five, we reported a net loss for the quarter of $1.1 million, or a net loss of $0.08 per diluted share, compared to a loss of $4.1 million, or a net loss of $0.30 per diluted share in the fourth quarter of 2018. At the end of the fourth quarter of 2019, our headcount was 262. I will now highlight our results for the full year 2019. Total revenues were $33 million, compared to total revenues of $34 million in 2018. Operating expense on a non-GAAP basis for the full year 2019 was $28.9 million, including $17.8 million in R&D growth expense.
This compares to an operating expense on a non-GAAP basis of $26.7 million in 2018, including $14.7 million in R&D growth expense. During the full year 2019, the non-GAAP gross margin was 70.6%, compared to non-GAAP gross margin of 74.3% in 2018. Non-GAAP operating loss for the full year 2019 increased to $5.6 million, compared to an operating loss of $1.4 million for the full year 2018, mainly due to a decrease in revenues and an increase in R&D expenses. Non-GAAP net loss was $4.6 million, or a net loss of $0.33 per diluted share, calculated on the basis of 13.8 million diluted shares, compared to a non-GAAP net loss of $300,000 in 2018, or a net loss of $0.02 per diluted share. Turning to the balance sheet.
As you can see on slide nine, our cash equivalent, and short-term bond deposits at the end of the quarter were $69.3 million. We believe that our strong balance sheet provide us solid footing to execute the opportunities ahead of us. That ends our prepared remarks. I will now turn the call back to the operator for questions.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star one . If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for questions. The first question is from Alex Henderson of Needham & Company. Please go ahead.
Very much. I was hoping you could talk a little bit about the outlook for 2020 at this point. Obviously, you gave some guidance on the revenue. What portion of that guidance do you think you currently have a high degree of line of sight to relative to contracts that you've already won? How much of it comes from contracts that you need to bring in? Could you talk a little bit about what kind of pipeline you have relative to potentially giving some upside to those numbers?
Good morning, Alex. I think I would start with a summary of what we did in 2019 in terms of customer wins. As you recall, we extended our logos with two new tier one accounts. This, mixed with a strategy to go into multi-year contracts, give us very good visibility into 2020. We start the year with a significant revenue in our backlog, and this give us good confidence that we could meet this guidance.
Along the year, we are asked about the pipelines. We are currently engaged with multiple additional customers, as well as additional opportunities within our install base. Obviously, this should be materialized along the year. I think the main change done in 2019, that we managed to enlarge our customer base, get more multi-year agreements, and by that, increase the visibility into the 2020 revenue significantly. In terms of the opportunity we see, as our strategy is still to focus on the tier one, we are engaged in multiple processes with the different tier one globally. As we know, those processes and sales cycles are taking a long time, and it's very hard to anticipate where they are going to materialize. Most of the revenue is based on our existing install base, and by that, gives us the high visibility.
A smaller part is still unsecured and based on our success with winning more projects, either within the existing install base or new accounts.
Given it's fairly early in the year, there's still obviously enough time to win an account and get some revenue from it this year. It seems likely that any accounts that were won later in the year would probably be more 2021 numbers. It sounds like if I were to summarize what I hear you saying, and tell me if I'm mischaracterizing it, you have in hand the vast majority of what you need to get to the 2020 numbers, and you have a solid pipeline, which should then give you some visibility to increasing the numbers in 2021, given the multi-year contracts nature of the current base and the fact that AT&T is now more of a subscription and less perpetual in nature. Is that the right characterization?
Generally speaking, yes. I would just add that still new wins in the first part of the year, like we announced Rakuten mid-2019, can materialize into revenue in 2020, like Rakuten was materialized in 2019. If orders from the last part of the year might probably take some time to implement and will impact 2021. We have good visibility, as I said, to the revenue. If I start, as you said, we are early in the year, and we have this good confidence to set this guidance that reflects growth. Some parts, obviously, are still to be executed along the year, which is, as I mentioned, could be mix of new wins and upside on existing accounts.
Given that backdrop, it's good news on the revenue, and we can forecast that reasonably easily. Can you give us some granularity around whether we should expect gross margins to be stable or improve, given the mix, and to what extent you intend to increase spending over the course of the year? How should margins track, and can we anticipate any improvement in the operating losses? Thanks.
Overall, the gross margin range that we are working with is in the range of 70%-75% yearly. As you recall, it might fluctuate quarterly, depends on the product mix. Overall, we are seeing more and more software-based solutions. As you recall, we have some customer that require us to deliver the service, which impact the product mix. We look on the expense, we are looking to do similar level of expense in 2020 and grow significantly on the revenue. By that, I would say, gives you some color on the direction.
I see. Just going down the line items, one of the critical areas for your cost structure has been the NRE on the R&D. Are you expecting a similar amount, less, more? Again, that's impossible for us to forecast that.
If we look on the last few years, we are looking on the similar number. Obviously, we cannot forecast exactly, but if we take the last three years, we were in around the same number. You can take this as a base.
Great. Just one last one. You've had some very good success with Rakuten. Obviously, it's a huge win and an indication of just how superior technology is. They are definitely picking the most advanced company to partner with. That program was pushed out from the launch time, I think from October into the April timeframe, if I remember correctly. Can you talk about how that changes the trajectory of the business? Does it slow it down for you? How do we think about the impact of that on your operations?
First of all, the bottom line, we don't see or expect any impact. The revenue and business model we have with Rakuten is not based on milestones, but it's more like a subscription, we are not relied on any of their milestones. That being said, Rakuten has launched a soft launch in late last October, if you follow, most of their milestones are public. They are progressing rapidly on their implementation of their cloud-native network. We are going end-to-end with them on implementing our solution and evolving with them with more use cases, more services, and more capacity. The current announcement was that in April, they are going to do a full launch, which is just in a couple of months.
For us, it's mainly exciting to see the technology comes to play and the key role of service assurance when operators try to build a new virtual network, how critical is the component of the service assurance to give them the visibility into issues, as obviously, building a new network is not easy. Most of the telecom today are established networks of 4G that are built for 10 years or so. When you look on companies like Rakuten, they just started to build their network, probably six to nine months ago. They are evolving and changing.
The fact that they have their eyes into their network and they see the transformations, they see the statistics, they see the issues, and they get insights on how to improve it, is really exciting and making us confident that while more operators will start to build new networks, either it's greenfields or 5G new networks, our technology advantage will come to play.
In that Rakuten ramp, is there any opportunities beyond what you licensed so far to ramp with them, or is it just a fixed license agreement, a subscription agreement?
Yeah, there is some increments, some of them already small increments already received. There is a bigger potential on two dimensions. One is on the 5G, on the longer term, there could be an upside to the subscription cost. As Rakuten mentioned, they are now looking to go global. By working with them in Japan, and both them successful and us successful in the implementation, it gives us the opportunity to work with them once they are implementing in other sites. My personal belief, I don't think they mentioned any timeline, that will take some time because they are mainly focusing now on Japan. I think in Q4, they started to be more vocal and that they are going global. For us, it's an opportunity that we have them as our partners.
If their plans will come through, this will give us an opportunity to replicate the same software stack into additional countries as they will implement more virtual networks globally. Nothing yet was announced, no new operation in another country. I do believe that the coming quarters will be focused on excellent execution in Japan. This is what I would expect, and we are also focused on their success would come once the network is up and running and operational and shows the high quality. If all goes well, this would start to become multiple projects.
Great. Thank you very much for those lucid answers. I appreciate it.
You're welcome. Thank you, Alex.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we pull for more questions. The next question is from Bhavan Suri of William Blair. Please go ahead.
Hey, guys. Thanks for taking my question, and nice to see growth coming back this year, so that's exciting. I just wanted to touch base here a little bit at a high level before we get into details here. You've been CEO for a month and a half. You've obviously been at the company a long time. You've talked about what's changing this year versus last year. Do you see an inflection in the pace of change? It still feels like outside of AT&T, the 5G roles are still pretty small, pretty sporadic, the sort of test and sort of sub-services, as you said. How should we think about what's changing between maybe 2018, 2019, and what you're seeing today from the end markets, that gives you guys confidence in the growth?
As you see our guidance, we expect significant growth, but we are not expecting to double the revenue in 2020. The inflection point is, might take time. If you follow the analysts of the 5G, the expectation is that 2020 will be the year of the standalone implementation of 5G, the real network change where you will need to do a refresh to your service assurance just to start during late 2020 or even 2021, and start to accelerate with more operators around the next couple of years. We do see that by winning more accounts, we manage to get and create growth. We see that the strategy to work on the multi-year agreements and work very closely with our tier 1 accounts and as partners and as strategic advisors, pays off and allow us to get this good visibility to 2020, and give this guidance.
I believe that the 5G is a long-term play. It's not that the market will happen all at once in 2020, and I'm building the company towards that. Today, the main focus in 5G is investment in R&D. We started that in 2019, and we continue in a higher pace 5G investment in the product. We believe as a technology company, that our growth will come with a technology advantage, that we had the virtualization capabilities that were helping us to win AT&T and Rakuten and others. We are keeping and investing to create unique capabilities into the 5G market that allow us, once transformation will happen, to secure new wins. About the inflection point, again, I can't exactly foresee if and when it will happen. We believe in our technology.
The feedbacks from the technology we get is very good. It all depends on the investment of the operators in 5G. We see a very encouraging fact that, as I mentioned before, 60+ operators already in production with the 5G initial phases. This is not yet a full-blown 5G networks. It's a important step. For both of us, as you mentioned, I have a lot of experience in this market. I recall the first days of the 4G. It's always start with tactical and initial implementations. This is a good sign that we are on the right path into full-blown implementation in the coming years. If there were some question marks about the pace on 5G, I think 2019 was giving more confidence that the market is growing.
Obviously, the telco is still suffering from output decrease and they are still slow in their investment. I think it's a consensus today that 5G network is going to come, and it's all going to be virtualized and containerized, where our investment in the last five years will create a technology advantage. Today, we are mainly working in our R&D to continue and create more and more advantages, as we believe that 5G network introduce new requirement and new challenges that we want to make sure we keep our differentiation in this case. Now we are mainly dependent on the operators to adopt it and obviously winning the accounts. We have the opportunities with our existing install base, which grow over 2019. We are looking to grow into more accounts in the next few years.
If all goes well, 5G is definitely an opportunity because it's a total refresh in the telecom. It's a global trend. It's bigger than just service assurance. It's a trend that changed the network so much, that it's clear that the service assurance will have to go through a refresh. It will open new opportunities. It will be based on virtualization technology, and we believe that this gives us a good position once it comes to the opportunities.
That's helpful. Thanks for the color. I got one more strategic one and then I'll dive into more tactical ones. Given the delay of the slower uptake or the slower shift to 5G, do you worry that competition has had time to start catching up? Are you seeing any change in the competitive environment? Any of the competitors building a software-only, virtual service capability, for intrusion detection, things like that? Or are they still relatively behind, still focused on a hardware-based world? How should we think about that competitive environment, given the more time for these guys to maybe think about updating their legacy stacks?
I would say that definitely in the last five years, since we launched the first virtualized assurance, competitors had time to invest and move to more components to software. We didn't stay still. We invested, in the last five years, a significant amount of R&D resource to continue and improve, crystallize, and innovate a lot around this product. I can just share that most of the customers that we meet are giving us a feedback that we still have a significant advantage compared to most competitors. I wouldn't underestimate any of our competitors, because some of them are big companies that can invest. So far, and both in VEON and Rakuten, it was a competitive RFP. They looked on all the market and all the players, and we managed to win due to our unique technology.
I'm confident that we have this advantage, but the market is not where we were five years ago. When we announced it five years ago, everyone told you that what RADCOM is doing, software is bullshit, let's spend on hardware. Now everyone understands this is the right direction, and everyone invests in software. We always need to keep and invest and innovate and create an edge, and this is what we are busy these days.
Got it. No, that's helpful. Thank you. A little more tactically, the company's talked about in the past the POCs, the Tier 1s workshops. Just an update in terms of how POCs with the large Tier 1s are progressing, obviously, AT&T being a separate one. Workshops and things like that, and this is obviously tying to not revenue this year, but revenue next year. Just have to get some color to the numbers there. Number of POCs, how they're progressing, number of workshops, how they're progressing.
What I can tell you that we are now, we are in any given time, engaged with multiple accounts in both workshops and POCs. I don't want to get into exact numbers. I think we are very busy on marketing our technology, mainly now with everyone very curious on how to address 5G. In any given time, we are active with multiple Tier 1s. Eventually, as I mentioned before, sales cycle is long, and it's a process. It's very hard to anticipate when those processes will materialize. We are busy today not only on the wins for 2020 revenue, but as you mentioned rightly, we are busy with also 2021, because we are talking about multi-year, long-term processes.
I think the message we get from the market is our technology is exciting, which is what's important, and when and if and how this will materialize to business, we are in February. Hopefully, along the year, we'll see more progress, and we'll have more announcements as we have progress with the business.
Got it. One last one for me. Renewals. Any major renewals coming up in 2020? If there are, can we talk about what that expansion could look like? Reduction could look like if there are any coming up in 2020.
Most of our contracts are multi-years and in a scale of three to four, five years. Most of them are not ending in 2020. Some of them do. We are working closely with those customers and working to secure those renewals. It's not most of the contracts, but some. It's not insignificant. If contracts are three to five years, you can estimate the range of what's relevant. I would say that Rakuten, that was just announced, VEON that was just announced, and AT&T just we announced late April that were multi-year, give us a lot of confidence for 2020.
Got it. Thank you, gents. Appreciate it. Thanks for taking my questions and for the color.
Sure. Thank you, Norman.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. We have a follow-up question from Alex Henderson of Needham & Company. Please go ahead.
Hey, guys.
Hi, Alex.
Thank you. It seems that there's a potential for pretty nice improvement in margins if you're holding the cost fairly stable, you have a little bit of improvement in mix on gross margins, and your revenue grows. Given the near breakeven for the quarter, is it reasonable to think that more than half the losses you posted in 2019, and maybe even get to a breakeven or a straight profit at some point during 2020, or is that too aggressive?
As we gave our guidance to the revenue, we didn't give any guidance on profit. We know that there could be fluctuations depending on the product mix and the projects, and we focus today on the growth. We do keep the investment on the technology high, and our intent is to mainly secure the growth and the wins on the 5G. That being said, as you hinted out, it looks that if we will keep the same range of gross margin, then we are getting closer, I would say, to the breakeven point. It depends eventually on the fluctuation on the exact wins and the product wins in this mixture.
Looks good. Thank you very much. Yeah, good point. Thanks, guys.
There are no further questions at this time. This concludes the RADCOM Ltd. Fourth Quarter and Full Year 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.