Ladies and gentlemen, thank you for standing by. Welcome to the Radcom Ltd. Results Conference Call for the Q4 and Full Year 2019. 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.vadcom.com from February 14, 2020. On the call today are Eyal Harari, Vadcom's CEO and Amir Hai, Vadcom'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 on the Investors section of Radcom's website at www.vadcom.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 in the company's statements about its 2020 revenue guidance, anticipated gross margins, intended expenditures and 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 5 gs pace of adoption, benefits and deployment and future plans of industry participants and customers. 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 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 NatCom's core operating performance and in evaluating and comparing our 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 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 Investors section of Radcom's website atwww.radcom.com/investor relations. 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 results for the Q4 of full year 2019. As you may have seen, total revenue were $9,000,000 for the Q4 of 2019, bringing our total revenue for the year to $33,000,000 which was at the high end of our 2019 revenue guidance. The solid end of the year reflects the progress made during 2018 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 and T and Globe. Our recent customer engagements are aligned with our strategy of entering multiyear 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 $35,000,000 to $38,000,000 Heading into 2020, we believe that 5 gs revolution has begun as more operators are beginning to launch their commercial 5 gs services, and we are continuing our work to make sure that Brascom is in position to benefit from this technological transformation. As 5 gs sets out to be such transformative technology, I would like to spend few moments explaining about this technology and the expected stages of its rollout. In initial 5 gs rollouts, competitor handsets connects to both 5 gs and 4 gs radios that, in turn, connect a subscriber to the same existing 4 gs core network. Today, we are at this stage of 5 gs, also known as 1st phase of 5 gs, and we see more and more of these limited scope 5 gs deployments. So far, just over 60 operators in 30 countries have launched 5 gs.
In this type of mobile network, operators may use their time service assurance solutions to monitor 5 gs services. Long term, we agree with industry consensus that the 5th generation mobile network is expected to lead the 4th industrial revolution in which technology is always connected and deeply embedded into society. 5 gs 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 tool suctions as well as remote surgery and fleets of drones connecting to the mobile network for service and disaster relief. Later this year, the 2nd phase of 5 gs standard is expected to be finalized by the 3GPP. In this network environment, operators will deploy an entirely new network core, and we need a new insurance solution to monitor mission critical always connected services.
In prior iterations of mobile network, low network performance would have meant a drop core. In the 2nd phase of 5 gs, low network performance can affect the success of a remote surgery or whether most of those won't fly safely. This means the platform 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 5 gs ready portfolio, and this year, we will continue to enhance our solution to answer the needs of our customers in the 5 gs era. We expect that R and D expense will continue to be a significant part of our operating expense as we maintain our high level of investment in R and 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 5 gs migration. We expect 5 gs adoption to pick up pace over the year, and we want to leverage our position as market leader for virtualized solution to engage with early adopters. As more advanced 5 gs use cases, such as remotely operated equipment and remote surgery, are introduced into the network that will require more advanced assurance capabilities and features that we can offer. During the Q4, we announced that we signed a new multi year contract with VintelCom to provide them with our fully virtualized network intelligence solution and ensure 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 50,000,000 customers 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 Rakuten 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 5 gs 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 Rakuten demonstrates our industry leadership.
Rakuten Mobile announced that it expects to launch fully commercial services in April of this year, and 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 5 gs. 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 and T. Our CapEngage software and support play an important role as AT and T continues to move forward with network virtualization to prepare for their expected nationwide rollouts of 5 gs.
At the end of 2019, AT and T announced they had virtualized 65% of their network and were on target to reach 75% at the end of this year. I'm encouraged by our progress to date and excited by the fact Brascom is key participant in some of the most exciting network transformation in the industry today. Looking to 2020, we expect a growth deal. We plan to continue to invest in R and D to support our customers' needs as they transition to 5 gs and believe we are well positioned to benefit from the migration to 5 gs. We expect the rollout of 5 gs 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, and good morning, everyone. 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 4th quarter with solid revenues of $9,000,000 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 $7,300,000 the same level in the Q3 of 2019. Our operating expenses are comprised mostly of R and D expenses. Adding the financial income of $300,000 net of tax expenses, the net loss for the quarter was $500,000 on a non GAAP basis.
Revenues for the quarter represent an increase from $4,000,000 in the Q4 of 2018. The increase was due to new contracts we announced and the related revenue recognized during 2019. Our gross R and D expenses for the quarter on a non GAAP basis increased to $4,500,000 from $3,900,000 in the Q4 of 2018. The increase is attributable to the investment in R and D required to maintain our technological leadership. R and D expenses for the quarter were approximately the same as in the Q3 of 2019.
Also, during the Q4, we received $425,000 from the Israeli Innovation Authority compared to $366,000 in the Q4 of 2018. Our net R and D for the quarter was $4,100,000 on a non GAAP basis compared to $3,500,000 in the Q4 of 2018. Sales and marketing expenses for the quarter were $2,500,000 on a non GAAP basis compared to $2,600,000 in the Q4 of 2018. G and A expenses for the quarter on a non GAAP basis were $741,000 compared to $643,000 in the Q4 of 2018. Operating loss on a non GAAP basis for the quarter was $911,000 compared to an operating loss of $4,200,000 for the Q4 of 2018 and to an operating loss of $1,100,000 for the Q3 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 $3,700,000 or a net loss of $0.27 per diluted share for the Q4 of 2018. This compared to a net loss of $998,000 or a net loss of $0.07 per diluted share for the Q4 of 2019. On a GAAP basis, as you can see on Slide 5, we reported a net loss for the quarter of $1,100,000 or a net loss of $0.08 per diluted share compared to a loss of $4,100,000 or a net loss of $0.30 per diluted share in the Q4 of 2018. At the end of the Q4 of 2019, our headcount was 262. I will now highlight our results for the full year 2019.
Total revenues were $33,000,000 compared to total revenues of $34,000,000 in 2018. Operating expense on a non GAAP basis for the full year 2019 was $28,900,000 including $17,800,000 in R and D gross expense. This compares to an operating expense on a non GAAP basis of $26,700,000 in 20.18, including $14,700,000 in R and D gross 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 $5,600,000 compared to an operating loss of $1,400,000 for the full year 2018, mainly due to decrease in revenues and an increase in R and D expenses.
Non GAAP net loss was $4,600,000 or a net loss of $0.33 per diluted share calculated on the basis of $13,800,000 diluted share 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 9, our cash, cash equivalents and short term bond deposits at the end of the quarter were $69,300,000 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. The first question is from Alex Henderson of Needham and Company. Please go ahead.
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? And how much of it comes from contracts that you need to bring in? And could you tell a little bit about what kind of pipeline you have relative to prudentially getting some upside to those numbers?
Alex.
I think I would start with a summary of what we did in 2,009 in terms of customer wins. And as you recall, we extended our logos with 2 new Tier 1 accounts. And this mix with a strategy to go into a multiyear contract give us very good visibility into 2020. We started the year with a significant revenue in our backlog. This gives us good confidence that we can meet this guidance.
Along the year, we are asked about the pipeline. We are currently engaged with multiple additional customers as well as additional opportunities within our installed base. And obviously, this should be materialized along the year. But I think the main change done in 2019 that we managed to enlarge our customer base, get more multiyear agreements and by that increase the visibility into the 2020 revenue significantly. In terms of the opportunity we see as we our strategy is still to focus on the Tier 1s.
We are engaged in multiple processes with different Tier 1s globally. But as we know, those processes are 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 installed base and by that gives us the size of the ability. A smaller part is still unsecured and based on our success with winning more projects either within the existing installed base or new accounts.
So 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. But it seems likely that any accounts that were won later in the year would probably be more 2021 numbers. So it sounds like if I were to summarize what I hear you saying, 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 'twenty one, given the multiyear contracts, nature of the current base and the fact that AT and T is now more of a subscription and less perpetual in nature. Is that the right characterization?
Generally speaking, yes. And I would just add that still new wins in the first part of the year, like we announced Rakuten mid-twenty 19 can materialize into revenue in 2020, like Rakuten was materialized in 2019. And but if revenues, sorry, 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 of that reflects growth. And 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.
So given that, it's good news on the revenue and we can forecast that reasonably easily, but we have a little bit more difficulty dealing with what 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 spend increased spending over the course of the year? How should margins track? And can we anticipate any improvement in the operating losses? Thanks.
So overall, the gross margin in range that we are working with is in the range of 70% to 75% yearly. As you recall, it might fluctuate quarterly, depends on the product mix. But overall, we are seeing more and more software based solutions. As you recall, we have some customer that requires to deliver the service and keep up the product mix. When we look on the expense, we are looking to do similar level of expense in 2020 and grow significantly on the revenue.
So by that, I would say, gives you some color on the direction.
I see. And just going down the line items, one of the critical areas for your cost structure has been the NRE on the gross margins or on the R and D, excuse me. Are you expecting a similar amount, less, more? Again, that's impossible for us to forecast that in
the 10% range? It's if we look on the last few years, we are looking on a similar number. Obviously, we cannot forecast exactly, but if we take the last 3 years, we were in around the same number. So you can take this as a base.
Great. And just one last one. So you've had some very good success with Rakuten. Obviously, it's a huge win and an indication of just how superior technology is because they are definitely picking the most advanced companies 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?
So 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. So we are not relied on their milestones. That being said, Rakuten has launched a soft launch in late last October. And if you follow most of their milestones are public, they are progressing rapidly on their implementation of their cloud native network.
And we are going hand to hand with them, implementing our solution and evolving with them with more use cases, more services and more capacity. The current announcement was that on April, they are going to do full launch, which is just in couple of months. And for us, it's mainly exciting to see the technology comes to play and the key role of service assurance in 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 4 gs that are built for like 10 years or so. But when you look in companies like Rakuten, the jet started to build the network probably like 6 to 9 months ago, they are evolving and changing.
And 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 be new networks, either it's greenfields or 5 gs new networks, our technology advantage will come to play.
So is there any in that Rakuten ramp, is there any opportunities beyond what you you've licensed so far to ramp with them? Or is it just a fixed license agreement, subscription agreement?
So yes, there is some implements, some of them already small implements already received. There is a bigger potential on 2 dimensions. 1 is on the 5 gs. On the longer term, there could be an upside to the subscription costs. And as Rakuten mentioned, they are now looking to go global.
And by working with them in Japan and both them successful and are successful in the implementation, it gives us the opportunity to work with them once they are implementing in other sites. Now this, my personal belief, I don't think they are they mentioned any time and that will take some time because they are mainly focusing now on Japan. But 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. And 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 there. Success will come once the network is up and running and operational and shows the high quality. And if all goes well, this could start to become multiple projects.
Great. Thank you very much for those lucid answers. I appreciate it.
Thank you, Alex.
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 1.5 months. You've obviously been in the company a long, long time.
You've talked about what's changing this year versus last year. Do you see an inflection in the pace of change? Because it still feels like outside of AT and T, the 5 gs 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 'eighteen, 'nineteen and what you're seeing today from the end markets that sort of gives you guys sort of confidence in the growth?
So as you see our guidance, we expect significant growth, but we are not expecting to double the revenue in 2020. So the inflation point is might take time. If you follow the analysts of the 5 gs, the expectation is that 2020 will be the year of the standalone implementation of 5 gs. 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 keep and start to
accelerate with more operators
around the next couple of years. We do see that by winning more accounts, we managed to get and create growth. We see that the strategy to work on a multiyear agreement and work very closely with our Tier 1 accounts 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 5 gs is a long term trade, not that the market will happen all at once in 2020. And I believe the company towards that.
Today, the main focus in 5 gs is investment in R and D. We started that in 2019, and we continue in higher pace 5 gs investment in the product. We believe as a technology company that our growth will come with a technology advantage that we build we had the virtualization capabilities that were helping us to win AT and T and Rakuten and others. Now we are keeping and investing to create unique capabilities into the 5 gs market that allow us once transformation will happen to secure new wins. Now about the inflection point, again, I can't exactly foresee if and when it will happen, But we believe in our technology, the feedbacks on the technology we get is very good.
And it all depends on the investment of the operators in 5 gs. We see a very encouraging fact that, as I mentioned before, 60 plus operators already in production with the 5 gs initial phases. This is not yet a full blown 5 gs network, but it's a first important step. And for both of us, as you mentioned, I have a lot of experience in this market. I recall the 1st days of the 4 gs, always start with tactical and initial implementations, but this is a good sign that we are on the right path into full blown implementation in the coming years.
So if there were some question marks about the pace on 5 gs, I think 2019 was giving more confidence that the market is growing. Obviously, the telco is still suffering from ARPU decrease and they are still slow in their investment. But I think it's a consensus today that 5 gs network is going to come and it's all going to be virtualized and containerized where our investment in the last 5 years will create a technology advantage. Today, we are mainly working in our R and D to continue to create more and more advantages as we believe the 5 gs network introduced new requirement, new challenges that we want to make sure we keep our differentiation in this case. And now we are mainly dependent on the operators to adopt it and obviously, winning the accounts.
So we have the opportunities with our existing installed base, which go over 2019. But we are looking to grow into more accounts in the next few years. And if all goes well, 5 gs 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.
But 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. So 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 sort of more tactical ones. But given the sort of the delay of the slower uptake or the slower shift to 5 gs, do you worry the competition has had time to sort of start catching up? Are you seeing any change in the competitive environment?
Any of the competitors building sort of a software only virtual service capability for including such and things like that? Or are they still sort of still relatively behind, still focused on a hardware based world? How should we think about that competitive environment given there's been some more time for these guys to sort of maybe think about updating their legacy stacks? So I would say that definitely
in the last 5 years since we launched the 1st virtualized assurance, competitors had time to invest and move to more companies to software, but we didn't stay still. We invested in the last 5 years significant amount of R and D resource to continue and improve, crystallize and innovate a lot around these products. 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 Peon and Rakuten, it was a competitive RFPs that looked on all the market and all the players and we managed to win due to our unique technology.
So I'm, for one end, confident that we have this advantage, but it's definitely not the market is not where we were 5 years ago. When we announced it 5 years ago, everyone told you that what LatAm is doing software is bullshit, let's spend on hardware. Now everyone understand this is the right direction and everyone invest in software. So we always need to keep and invest and innovate and create an edge and this is what we are busy these days.
Got it. Got it. No, that's helpful. Thank you. And then a little more tactically, you talked about the company has talked about in the past, the POCs, the Tier 1s, workshops, just an update in terms of how POCs with large Tier 1s are progressing, obviously, APG being a separate one.
And then sort of workshops and things like that, and this is obviously tying to not revenue this year, but sort of revenue next year. Just want to get some color to the numbers there, number of POCs, how they're progressing, number of workshops, how they're progressing?
So 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 it's we are very busy on marketing our technology, mainly now with everyone very curious on how to address 5 gs. So 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. But we are busy today not only on the wins for 2020 revenue, but as you mentioned rightly, we are busy also 2021 because we are talking about multiyear long term processes. I think it's 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 material to business, we say we are in February. Hopefully, along the year, we'll see more progress and we'll have more announcements as we progress with the business.
Got it. Got it. One last one from me. Renewals, any major renewals coming up in 2020? And if they are, can we talk about what that expansion could look like or reduction could look like if there are any coming up in 2020?
Most of our contracts are new peers in a scale of 3 to 4, 5 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. But if contracts are 3 to 5 years, you can estimate the range of what's relevant.
I would say that Rakuten that was just announced, Vyond that was just announced and AT and T just we announced like April that we're multi year give us a lot of confidence for 2020.
Got it. Thank you, gents. Appreciate it. Thanks for my questions and for the color.
Sure. Thank you, Bhavan.
We have a follow-up question from Alex Henderson of Needham and Company. Please go ahead.
Hey, guys.
Hi, Alex. Hi, Alex.
Thank you. And it seems that there's a potential for pretty nice improvement in margins if you're holding the costs fairly stable, you have a little bit improvement in mix on gross margins and your revenue growth. Given the near breakeven for the quarter, is this reasonable to think that more than half the losses you posted in 'nineteen and maybe even a bit too of a breakeven or a slight profit at some point during 2020? Or is that too aggressive? So
as we gave our guidance to the revenue, we didn't give any guidance on profit. We know that there could be fluctuations depend on the product mix and the projects, and we focus today on the growth. We do keep the investment of the on the technology high, and our intent is to mainly secure the growth and the wins on the 5 gs. 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. And it depends eventually on the fluctuation on the exact wins and the product wins in this mixture.
There are no further questions at this time. This concludes the Radcom Ltd. 4th quarter and full year 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.